You know that a court has discretion to award attorney fees under ERISA if a party shows “some degree of success on the merits.”
But how do you define “success”? A new third circuit case reminds one of that old Milton Berle line: “If opportunity doesn’t knock, build a door.”
Here’s the case of Templin et al v. Independence Blue Cross et al., __ F.3d __ (3rd Cir. May 8, 2015)(Even voluntary settlements, where no judgment was entered, can result in an award of attorney fees under the “catalyst” theory.)
FACTS: Plaintiffs sought payment for blood-clotting products under an ERISA plan. Defendants moved to dismiss for failure to exhaust administrative remedies. The Court denied the motion and Defendants eventually paid the claims, and settled the claims. Plaintiffs then sought $349,385 in attorney fees.
DISTRICT COURT HELD: Attorney fees denied because the court had never made a substantive determination on whether Plaintiffs were entitled to the recovery, and the parties settled the claim “without a judgment from the Court.”
THIRD CIRCUIT HELD: Reversed and attorney fees awarded.
- “[T]he ERISA statute does not limit fee awards to the prevailing party.” Op. at 7.
- “[T]he Supreme Court has specifically acknowledged that attorney fees are available even ‘without a formal court order.’” Op. at 8.
- At least four other circuits have adopted the “catalyst” theory to statutes that lack prevailing-party requirements. Op. at 8.
- “[U]nder the catalyst theory, a party is eligible for attorney’s fees where his or her litigation efforts resulted in a voluntary, non-trivial, and more than procedural victory….” Op. at 10.
- Plaintiffs sued for interest on unpaid amounts. The Court held plaintiffs were entitled to recovery of attorney’s fees because the parties settled for “100% of the interest sought.” [W]e find that the pressure of the lawsuit caused [Defendants] to change their position….” Op. at 11.
When you see a claim for disability or life insurance benefits by a public school teacher, you might assume the claim is not governed by ERISA because of the governmental plan exception.
But don’t stop there. You need to see how the benefit was set up. If the benefit was funded through a union plan, ERISA might apply.
Here’s the case of Wilson v. Provident Life and Accident, __ F. Supp. 3d __, (W.D. Washington April 29, 2015) (“Where unions of public employees enter insurance agreements that are not a result of collective bargaining, the plans may be found to be nongovernmental [and therefore governed by ERISA].”).
FACTS: Public school teachers were eligible for life insurance benefits through a Plan independently created by a union, for the benefit of its employees, and government employees. The benefit was funded through a contract between the union and Unum/Provident. After a teacher’s claim for insurance benefits was denied, suit followed with assertion of state law bad faith claims. Unum removed the case, contending the claim was governed by ERISA. Plaintiff claimed, however, that ERISA did not apply because of the “governmental plan” exception to ERISA.
ISSUE: Whether a public school teacher’s life insurance benefit claim was governed by ERISA?
DISTRICT COURT HELD: YES
- One exception to application of ERISA is a governmental plan, defined as “a plan established or maintained for its employees…by the government of any State or political subdivision thereof.” Op. at 4.
- “It is undisputed that the WEA (union) is an ‘employee organization’ for ERISA purposes, and [the school district] is a political subdivision…” Op. at 4.
- The school district employees “enrolled in a Group Plan that covered employees from multiple school districts and from the WEA, and was governed by [the WEA’s contract with Provident.]”
- “Other courts have held that a private plan does not become a public plan merely through a public employer’s participation.” Op. 7, fn 4.
- The Court finds that “the Group Plan is not a governmental plan…. The Group plan was not the result of collective bargaining, but the result of a separate negotiation between the WEA and Provident; the District merely ‘elected’ to participate in the Plan.” Op. at 8.
- “Where unions of public employees enter insurance agreements that are not a result of collective bargaining, the plans may be found to be nongovernmental (and governed by ERISA).” Op. at 8.
- The plan is governed by ERISA because “the Plan was independently created by the WEA for the benefit of its employees along with government employees [and the school districts played no direct role in the Plan’s creation.]” Op. at 10.
When it comes to recovery of overpayments from ERISA beneficiaries…
money is a fungible commodity in the Eleventh Circuit, but is not a fungible commodity in the Ninth Circuit.
This week the U.S. Supreme Court agreed to address recovery of overpayments to ERISA beneficiaries.
- The Problem: Many times an ERISA plan may overpay a beneficiary. Under ERISA, beneficiaries are promised prompt payment of benefits if they are injured or disabled on the job, but they also agree to repay whatever they get later from the Social Security Administration or from a settlement in a lawsuit.
- The Issue: Currently, getting that overpayment back from the beneficiary can be lots more challenging if the overpayment occurs in the Ninth Circuit…
In the Ninth Circuit money, apparently, is not a fungible unit of exchange. ERISA plans cannot recover funds from the beneficiary unless specific funds from a settlement or the Social Security Administration can be tracked. If the beneficiary spends that money before the plan can get a court order forcing repayment, the insurer is out of luck. Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F. 3d 1083 (2012)(Plaintiff received $30,000 in overpayments. Court refused to order repayment because the funds could not be tracked.) The Eighth Circuit follows this line of reasoning, too.
But money in the Eleventh Circuit is a fungible unit of exchange, making recovery of ERISA plan overpayments lots easier. Last November 2014 the Eleventh Circuit determined that when a plan unambiguously gives itself a first-priority claim to third party payments, then an equitable lien attaches immediately upon the receipt of specifically identifiable funds. This makes it irrelevant that the funds were subsequently spent or dissipated. Board of Trustees of the National Elevator Industry Health Benefit Plan v. Montanile, 593 F. App’x 903 (11th Cir. 2014)(The Plan spent $124,000 in medical expenses. When Montanile obtained $500,000 from a lawsuit… he spent it quickly. The Court rejected Montanile’s argument that no repayment was required because the funds had dissipated). Most circuits follow this analysis.
- The US. Supreme Court Accepts Review. By accepting review of Montanile this week, the Supreme Court may endeavor to resolve this interesting split, which has complicated recovery of overpayments.
The U.S. Department of Labor (DOL) and the Employee Benefits Security Administration (EBSA) just issued a “Fact Sheet” describing Fiscal Year 2014 civil and criminal enforcement activity under ERISA.
Here is a copy of the fact sheet.
Key Take Aways on DOL’s Enforcement Efforts:
- EBSA oversees about 684,000 retirement plans, 2.4 million health plans and a similar number of welfare plans. These plans cover about 141 million workers, plus their dependents.
- More criminal investigations, but fewer guilty pleas. In 2014, DOL closed 365 criminal investigations: that is about 30% more than 4 years earlier. It represents a continuing trend of more criminal investigations that started around 2000. They indicted 106 individuals and obtained 85 “guilty pleas or convictions”. This is lower.
- More civil investigations, focused on protection of plan assets and participants’ benefits. The DOL closed about 4000 civil investigations in 2014. This is up in more recent years, but in 2002 there were 25% more civil investigations. The DOL’s strategic plan through 2018 calls for increased civil enforcement.
- Monetary results lower. The Fact Sheet claims $599.7 million was restored through enforcement. This is low compared to more recent years.
- Compliance Assistance. EBSA provides incentives to fiduciaries who voluntarily report and self-correct ERISA violations. About 1643 applications were filed last year to disclose and self-correct violations.
- Late Filings. About 25,000 applications for the Delinquent Filer Voluntary Compliance Program were filed last year.
You already know that ERISA regulations require the plan administrator to render a decision on an administrative appeal within 45 days.
If more time is needed, the ERISA regulations require that the plan administrator notify the beneficiary before the 45 day period expires that more time is needed due to special circumstances.
BUT what should be in the plan administrator’s notice letter to the beneficiary indicating more time is needed?
Here’s the case of Dimery v. Reliance Standard Life Ins. Co., slip op. 12-17550 (9th Cir. March 11, 2015)(unpublished).
FACTS: Dimery sought disability benefits under Genentech’s ERISA-governed plan. Reliance notified Dimery that it wanted an independent medical evaluation, but did not expressly state it needed additional time beyond the 45 day period. On the 64th day, Reliance affirmed the decision terminating Dimery’s benefits.
Dimery sued for wrongful denial of benefits, and argued Reliance’s failure to provide a decision within 45 days required the court to apply de novo review, rather than “abuse of discretion” review.
ISSUE: Whether the plan administrator’s failure to provide adequate notice beyond the 45 day appeal period changes the standard of review to de novo review rather than “abuse of discretion” review?
NINTH CIRCUIT HELD: Abuse of Discretion Review Applied, Despite the Untimely Decision (Due to Inadequate Notice).
- 29 C.F.R. § 2560.503-1(i)(1)(i), (i)(3)(i) requires the plan administrator to render a decision on an administrative appeal of a denial of benefits within 45 days. Extra time is allowed if the administrator provides notice before the 45 day period expires that additional time is required due to special circumstances. Op. at 2.
- The court found that the plan administrator’s notice letter was insufficient. Op. at 3.
- However, “ERISA procedural violations do not alter the standard of review unless violations cause the beneficiary substantive harm.” Op. at 3. “‘[P]rocedural violations of ERISA do not alter the standard of review unless those violations are so flagrant as to alter the substantive relationship between employer and employee….’” Op. at 3.
- Also, there was no evidence the denial of benefits was “necessarily the mechanical result of a violation of the terms of the Plan.” The Plan did not state that a particular result would ensue from a failure to adhere to the time limits for reviewing the denial of benefits. Op. at 3
- Finally, Dimery failed to identify “any substantive harm resulting from Reliance’s untimely decision.” Op. at 3
KEY TAKE AWAY: The notice letter to the beneficiary should expressly state: (1) when the 45 day period expires, and (2) why more time is needed.
How about those Gonzaga University Bulldogs (Men’s Team and Women’s Team) in the Sweet Sixteen?
Does an arbitrary and capricious denial of ERISA governed disability benefits create a right to disgorgement of profits? NO.
The Sixth Circuit helps clarify the point in Rochow v. LINA, __F.3d__, 2015 WL 925794 (6th Cir. Mar. 5, 2015)(PDF)(En banc decision reverses trial court decision ordering about $3 million disgorgement of profits for arbitrary/capricious denial of disability benefits.)
FACTS: Rochow sued LINA claiming it had wrongfully denied ERISA-governed disability benefits. After the district court ruled that the denial of benefits was arbitrary and capricious, and entered judgment in 2005, LINA appealed. The 6th Circuit affirmed the decision in 2007. 482 F.3d 860 (6th Cir. 2007). Plaintiff then moved for an equitable accounting and disgorgement of profits. The district court granted that motion, and ordered LINA to disgorge about $3 million in profits it made on the benefits withheld. LINA appealed, again. This time a divided panel affirmed the disgorgement decision by the trial court. 737 F.3d 415 (6th Cir. 2013). The court granted LINA’s petition for rehearing en banc.
ISSUE: Is Rochow entitled to recover about $3 million in disgorgement of profits for LINA’s arbitrary and capricious denial of long-term disability benefits?
6th Circuit HELD: NO. (Majority 9 judges, Dissent 6 judges).
- The majority decision assumed that the trial court concluded that LINA had breached its fiduciary duty by arbitrarily and capriciously denying benefits. Op. at 6.
- The majority held that Rochow was made whole under § 502(a)(1)(B) through recovery of his disability benefits and attorney’s fees, and potential recovery of prejudgment interest. Op. at 9, 10.
- Allowing Rochow to recover disgorged profits under § 502(a)(3) would result in impermissible duplicative recovery. Op. at 10.
- The Supreme Court has established that “‘where Congress elsewhere provided adequate relief for a beneficiary’s injury, there will likely be no need for further equitable relief, in which case such relief normally would not be appropriate.’” Op. at 8. (emphasis in original).
- There is no cited “case that allowed disgorgement of profits under 502(a)(3) after the claimant recovered for wrongful denial of benefits under 502(a)(1)(B).” Op. at 9.
- Citing Supreme Court precedent, the majority opinion reiterates: equitable relief is available only for injuries caused by violations that § 502 does not elsewhere adequately remedy. Op. at 8.
- The underlying decision incorrectly presented a new measure of damages that would apply virtually every time a court decided benefits were denied on an arbitrary and capricious basis. This would be plainly beyond and inconsistent with ERISA’s purpose to make claimants whole. Op. at 9.
- The court remanded the matter to the district court to consider whether Rochow is entitled to prejudgment interest, cautioning that any interest awarded cannot be “at a rate so high that the award amounts to punitive damages.” Op. at 14.
- The dissent held that breach of fiduciary duty is a separate claim that by definition results in a distinct injury, and therefore supports a distinct remedy. Op. at 27.
KEY TAKE AWAY: With a deep split in the opinions, and vigorous argument on both sides, one should expect to see the disgorgement theory asserted in other cases. The better argument is the one presented by the majority, but there are arguments to make, as shown by the dissent.
You already know that employee benefit plans established by governmental entities are exempt from ERISA.
But ERISA might apply if the employee benefit for the government employee is established through an association. Moreover, you need to make sure the “governmental entity” is actually a “governmental entity” under ERISA. For example, plans that involve both public and private employers may result in ERISA application. See, e.g., South Cent. Indiana Sch. Trust v. Poyner, No. 1:06-cv-1053-RLY-WTL, 2007 U.S. Dist. LEXIS 78804, 2007 WL 3102149, at *5 (S.D. Ind. Oct. 19, 2007) [*5] (”[T]he Plan at issue involves both public and private employers for the benefit of their respective employees. It is therefore subject to ERISA regulation.”)
This issue is highlighted by the recent case of Raible v. Union Security Insurance Co., 2015 WL 746213 (W.D. Pa. February 20, 2015)(PDF) (Court applies very broad definition of “a plan established by government” to conclude government exemption from ERISA applies).
FACTS: Raible was employed as a school nurse in a school district, a government entity in Pennsylvania. Plaintiff also was a member of the Pennsylvania School Board Association (PSBA). PSBA is not a governmental entity. It provided disability benefits, insured by Union Security Insurance Company, to its members.
After her disability benefits were denied, Raible brought a breach of contract action.
Union removed to federal court, contending the claim was governed by ERISA. Union contended the governmental plan exemption did not apply because: (1) PSBA is the policyholder and is not a governmental entity, and (2) the school district did not sponsor the plan.
ISSUE: Is this government employee’s disability benefit governed by ERISA?
HELD: Claim is NOT governed by ERISA.
- “ERISA broadly applies to ‘any employee benefit plan if it is established or maintained by an employer…or by an employee organization…representing employees engaged in commerce.’” Op. at 4.
- “‘[G]overnmental plans’ are expressly exempted under ERISA[.] The term ‘governmental plan’ means a plan established or maintained for its employees by the Government ….” Op. at 4 (Emph. added).
- “[O]ther circuits have constructed [the term] ‘established’ broadly…. Op. at 5.
- The court holds that this plan was “established” by the government because: (a) the school district purchased the plan for the exclusive benefit of its employees through the PSBA Insurance Trust; and (b) The school district is listed as a “participating employer” under the policy. Op. at 6.
Can a participant designate a beneficiary merely with a phone call? You need to look at the plan documents.
But are beneficiary designation forms ERISA “plan documents”? It depends, and it makes a difference.
Here’s the case of Mays-Williams v. Williams, __ F.3d __ (9th Cir. January 28, 2015) (PDF).
The court addresses an issue of first impression: What documents are “plan documents”? The case also shows why that is such an important issue to resolve.
FACTS: Asa Williams divorced his wife, Carmen, in 2006. In 2007, 2008 and 2011 Williams “telephonically undesignated” his former wife, and named his son as beneficiary. Each time, however, Williams failed to return a signed beneficiary designation form. He died in 2011.
After his death his former wife, Carmen, claimed the benefits of the Xerox ERISA-governed benefits. The plan interpleaded the funds into the court.
TRIAL COURT: Because Williams failed to complete the beneficiary form, his former wife was entitled to the ERISA benefits.
NINTH CIRCUIT REVERSES:
- Asa Williams “telephonic undesignations” were valid because “[n]othing in the governing plan documents prevents unmarried participants from designating beneficiaries by phone.” Op. at 13.
- The beneficiary designation forms are NOT plan documents because these forms “simply confirm the participant’s attempt to change his designated beneficiary….” Op. at 9-10.
- “[W]hile the plan documents require written designations for married participants, they decline to impose any sort of writing requirement on unmarried participants.” Op. at 14 (Emph. in original).
- “[O]nly [documents] that provide information as to ‘where [the participant] stands with respect to the plan’, such as a [Summary Plan Description] or trust agreement might, could qualify as governing documents with which a plan administrator must comply in awarding [ERISA] benefits….” Op. at 9.
As you know, ERISA plan administrators must consider Social Security Administration (SSA) disability determinations when making the disability benefit decision.
ERISA plan administrators are not bound by the SSA’s determination. But the benefit denial letter should provide an explanation why the SSA determination was not followed. Failure to provide that explanation raises questions whether the adverse benefits determination was ‘the product of a principled and deliberative reasoning process.’
So, it is always worthwhile to see the latest trends in disability findings from the Social Security Administration.
Here’s the “Annual Statistical Report on the Social Security Disability Program” (SSA Pub. No. 1311826, December 2014):
A few highlights:
1. 35% of people getting Social Security disability benefits have been diagnosed with a mental disorder.
-Massachusetts and New Hampshire have the highest percentage of individuals with a mental disorder: 49.9%.
-Washington D.C. ranks in the top ten of jurisdictions where disabled beneficiaries have a mental disorder diagnosis.
-Alabama, Georgia, South Carolina, Arkansas and Louisiana have the lowest percentage of disabled with mental health diagnoses (28-30%).
2. The total number of SSA disabled beneficiaries has increased 49.7% since 2003.
3. The total number of SSA disabled beneficiaries has increased 14.3% since 2009.
4. 27.7% of disabled individuals have been diagnosed with musculoskeletal issues.
You already know that when a claimant brings suit alleging wrongful denial of ERISA-governed disability benefits, the first issue the court looks at is: what standard of review applies. If the plan or policy includes “discretionary review” language, then the court should affirm the claim decision absent an abuse of discretion. If the plan or policy is silent on the issue, the court applies de novo review.
In recent years, many state insurance regulators have issued regulations or legislation banning discretionary review in ERISA-governed claims decisions. Here in Washington, for example, the Insurance Commissioner issued a regulation banning abuse of discretion language in disability policies.
But other states, like Minnesota, have no such regulation banning discretionary review.
Consider the choice-of-law argument when assessing whether the claim will be reviewed under an abuse of discretion standard.
Here’s the case of Brake v. Hutchinson Technology, Inc., __ F.3d__, 2014 WL 7345692 (8th Cir. December 29, 2014) (Choice of law provision allows abuse of discretion review despite regulation banning discretionary review).
FACTS: Brake, who works in South Dakota, made a claim for ERISA-governed disability benefits provided by her employer, Hutchinson. Hutchinson is based in Minnesota and the long term disability policy was issued in Minnesota. The policy contained language requiring discretionary review, and the plan contained a choice-of-law provision requiring application of Minnesota law. South Dakota has banned discretionary review. Minnesota has no such regulation.
ISSUE: What standard of review applies: South Dakota law and de novo review, or Minnesota law and abuse of discretion review?
8th Circuit Court of Appeals HELD: Minnesota law and the abuse of discretion standard applies.
- “’Where a choice of law is made by an ERISA contract, it should be followed, if not unreasonable or fundamentally unfair.’” Op. at 5.
- “We find nothing unreasonable or fundamentally unfair about enforcing the plan’s Minnesota choice-of-law provision.” Op. at 5.
- The South Dakota ban on discretionary review did not apply because Minnesota law controls.