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).

  1. 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.
  2. 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.
  3. Allowing Rochow to recover disgorged profits under § 502(a)(3) would result in impermissible duplicative recovery. Op. at 10.
  4. 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).
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.

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Photo of Mike Reilly Mike Reilly

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment…

Mike Reilly is a nationally recognized labor, employment and employee benefits attorney, named one of the “Top 100 Most Powerful Employment Attorneys in the Nation” for the past five consecutive years by Human Resource Executive®. He has decades of experience providing strategic employment advice, and has represented clients in more than 75 jury trials, arbitrations, bench trials and claims before the EEOC and Washington State Human Rights Commission.

Small and large employers retain Mike for his strategic advice and decades of experience in employment issues and litigation, business decisions and litigation avoidance. Mike provides advice in claims involving discrimination, retaliation, wrongful discharge, disability accommodation, ERISA and non-ERISA employee benefit claims, and wage/hour claims. He served as lead counsel in an employee raiding/trade secret case as reported in the Wall Street Journal, and defends employers in class action claims.

Mike’s remarks on employment issues have been quoted in NewsweekCorporate Legal TimesSeattle TimesEmployee Relations Law JournalPuget Sound Business JournalCFO.com, and other professional journals and management publications. Chambers USA’s Guide to America’s Leading Lawyers for Businessrates Mike in the top ranking (band one) for his work in labor and employment law, and has described him as “one of Seattle’s top-rate attorneys” who is “truly phenomenal [with] superb legal instincts” and “an amazingly assertive litigator.” His clients include Nordstrom, Seattle Seahawks, Home Depot, KeyBank, Starbucks, Fred Hutchinson Cancer Research Center, Red Robin and Seattle Chamber of Commerce, among others.