ABA Section of Business Law
ABA Section of Business Law
Business Law Today
July/August 2000
Balancing the benefits New rulings affect ERISA claims
By PETER M. KELLY
Just how hard is it for a retiree to question a company’s benefits decision? Recent court cases may change the equation.
The Employee Retirement Income Security Act of 1974 (ERISA) affords employee benefit plan participants ready access to court to challenge a plan’s determination of their benefit rights.
However, courts hearing such cases have traditionally presumed that benefit determinations made by plan fiduciaries are correct. Specifically, the benefit determinations of fiduciaries who are granted discretionary authority by an employee benefit plan are entitled to judicial deference similar to the deference normally afforded to administrative law judges. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 114-15 (1989). This is a powerful tactical advantage that plans and plan fiduciaries would be well advised to zealously protect.
Despite this advantage, ERISA lawsuits are among the most common (seventh most frequent) categories of cases clogging our federal court system. Most ERISA cases are at heart claims for additional benefits, although plaintiffs have recently been attaching other claims (such as fiduciary-breach claims, reporting or disclosure claims or ERISA retaliation or discrimination claims) to their benefit claims.
Unlike ADEA and other claims that may be waived, an employee ordinarily cannot waive or release his or her future retirement plan rights. Many benefit disputes are equivalent to a business divorce. A disgruntled participant’s litigation decisions may be motivated by anger or revenge and often are not restrained by normal economic considerations.
Although defendant plans and fiduciaries often prevail in such cases, defending an ERISA lawsuit can be expensive. Lawsuits challenging the outcome of a plan’s internal benefit appeal process rarely are resolved before the defendants are forced to incur significant discovery costs.
The Seventh Circuit recently issued two opinions that could have a significant impact on benefit claim lawsuits conducted in courts throughout the country. These opinions, authored by two of the most prolific judges in the federal judicial system, each contain unusually blunt guidance for future litigants. Taken together, these decisions could lead to new restrictions on discovery in ERISA benefit claim cases and will offer a sharper distinction between plan decisions that will be afforded deference and those that will not.
Let’s first look at the Firestone deferential standard of review. If an ERISA plan expressly grants plan officials discretionary authority to determine eligibility for benefits or to interpret the terms of the plan, a court second guessing that decision must use a favorable standard of review that gives these plan fiduciaries the benefit of the doubt. Firestone, 489 U.S. at 114-15. The decision of the plan fiduciary will ordinarily only be overturned if the plan fiduciary acted in an "arbitrary and capricious" manner. Id. at 111.
This standard of review is also referred to as the "abuse of discretionary" standard because an arbitrary and capricious decision is often described as an abuse of the discretion granted to the plan fiduciary. One way to think of this deferential standard of review is that it creates a presumption that the fiduciary making the benefit decision did so properly.
A plaintiff may overcome or weaken this presumption. The strength of the presumption will vary depending on the facts and circumstances. For example, if there is evidence that the fiduciary has a conflict of interest in making the decision, the presumption might be weaker than if no conflict of interest is present.
This conflict of interest exception is frequently asserted by plaintiffs in ERISA cases based on language in Firestone suggesting that a conflict of interest is the type of factor that might alter the degree of deference. However, courts will generally require plaintiffs to point to specific evidence of a conflict of interest beyond the mere status of the fiduciary as an employee or officer of the plan sponsor in order to seriously affect the Firestone deferential standard of review. Chalmers v. Quaker Oats Co., 61 F.3d 1340, 1345 (7th Cir. 1995).
If the decisions challenged in court were not made by fiduciaries who are granted interpretive discretion, the court is not required to give deference to the fiduciary’s decision. In such cases, the court must review the benefit claim de novo. Firestone 489 U.S. at 114-15. As the literal meaning of that phrase suggests, a court reviewing the benefit denial on a de novo basis takes a "new look" at the issue and makes its own decision without any presumption favoring the earlier decisions.
Review is generally limited to matters in the "administrative record." An integral part of the arbitrary and capricious standard is that the court considers the conduct of the fiduciary based on the information available to the fiduciary. Thus, the court considers whether the fiduciary acted in an arbitrary and capricious manner based on the information actually presented to, or readily available to, the fiduciary. The plaintiff will not be able to prevail in an arbitrary and capricious review by raising new arguments that could have been, but were not, presented to the fiduciary at the time the decision was made. Rather, the court limits its review to the administrative record before the fiduciary at the time the decision was made (that is, arguments made by the participant and documents and other evidence offered by the participant).
In a de novo review, courts are more willing to allow new evidence to be considered since the administrative record remains open for the court’s "new look" at the issue. However, the central issue remains whether the fiduciary acted properly. Thus, even in a de novo review, plaintiffs will generally be prohibited from introducing facts that could not have been known at the time of the earlier decision. Even if the full-blown ERISA prudence standard applies, the test is how would a prudent person have acted with the information the fiduciary actually had or should have had, not based on information that was not available.
And then there’s the Perlman case, with its potential use to curtail discovery in benefit claim disputes. In Perlman v. Swiss Bank Corp. Comprehensive Disability Protection Plan , 195 F.3d 975 (7th Cir. 1999), rehearing denied, 2000 U.S.App. LEXIS 217 (7th Cir. 2000), the Seventh Circuit joined most of the other circuits in endorsing a strict application of the limitation of relevant evidence to those matters appearing in the "administrative record."
If this were all that Perlman stood for, little would distinguish it from similar rulings in other circuits. But Judge Esterbrook went beyond the majority rule. He offered strong language advocating limitations on discovery of the type that are usually only available when decisions of administrative agencies are challenged.
The judge wrote that "[t]here should not have been any inquiry into the thought processes" or the "training of those who considered Perlman’s claim, and in general who said what to whom." Id. at 981. He criticized the district court for allowing these issues to be explored "at length by depositions and interrogatories." Id. at 982. He allowed that discovery could be used to explore whether there was any evaluation of the claim performed at all but that beyond that, "[d]eferential review ... means review on the administrative record" and "judicial review is limited to the evidence that was submitted in support of the application for benefits." Id. at 981-82. Accordingly, he concluded that "the mental processes of the plan’s administrator are not legitimate grounds of inquiry any more than they would be if the decision maker were an administrative agency." Id. at 982.
By explicitly comparing plan decisions to the decisions of administrative agencies and expressly criticizing the scope of discovery, the judge invited future litigants to consider the line of cases curtailing the scope of discovery relating to administrative agency and administrative law judge decisions.
The "administrative record" limitation applies to challenges to administrative agency and administrative law judge decisions. See, Florida Power & Light v. Lorion , 470 U.S. 729, 743-44 (1985); Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc. , 435 U.S. 519, 549 (1978); Federal Power Commission v. Transcontinental Gas Pipe Line Corp., 423 U.S. 326, 331 (1976); Camp v. Pitts, 411 U.S. 138, 142 (1973); Tagg Bros. & Moorehead v. United States , 280 U.S. 420, 444 (1930); Louisville & Nashville R.R. Co. v United States , 245 U.S. 463, (1918).
The discovery of materials outside of the record has been expressly rejected because review is "on the record" and the additional "material sought cannot ‘lead to the discovery of admissible evidence’ Rule 26(b)." Walled Lake Door Co. v. United States, 31 F.R.D. 258 (E.D. Mich. 1962).
In an inquiry limited to the administrative record, "the only potential area in which discovery would be relevant ... is with regard to identification of the administrative record." Marathon Oil Co. v. United States, 1989 U.S. Cl. Ct. LEXIS 92 (1989). Where a deposition was taken regarding an administrative agency decision, it was stricken. Scalzo v. Hurney, 338 F.2d 339 (3d. Cir. 1964), cert denied, 382 U.S. 849 (1965).
The procedural questions that remain after Perlman involve the degree to which district court judges will rely on Perlman to restrict the scope of discovery. Judge Easterbrook is well respected and one of the most prolific ERISA jurists in the nation, with almost 30 published ERISA opinions. Certainly, his opinion in Perlman invites plans to seek restrictive case management orders or to seek to curtail discovery through motions for protective orders.
Even if a district court allows a plaintiff some latitude in discovery after Perlman, that case will serve as the foundation for motions in limine seeking to bar the introduction of evidence extraneous to the administrative record of the ERISA plan benefit determination. If ERISA defendants succeed in these efforts, Perlman may become a potent tool for controlling the costs of defending against ERISA claims.
The Hertzberger "safe harbor" raises the bar that ERISA plans must satisfy to earn Firestone deference. Shortly after Perlman, the single most prolific ERISA jurist, Judge Posner (71 published ERISA opinions), authored another ERISA benefit claim decision. With blunt language that has become his hallmark, in Herzberger v. Prudential Insurance Co. of America, 200 U.S. App. LEXIS 2579 (7th Cir. 2000), Chief Judge Posner steered the Seventh Circuit (Illinois, Indiana and Wisconsin) away from its own prior decisions and joined four other circuits in imposing stricter requirements before an ERISA plan can benefit from the Firestone deferential review standard. Id. *1-7 & *10.
Specifically, the court "clarified" that it will no longer apply the Firestone deference standard to plans that merely provide that benefits will be "determined" by plan officials even where the language specifies that such determination is made "on proof" or on "satisfactory proof." Id. *1-3 & *10. The judge found this language to be inadequate because it fails to specify clearly enough that the plan officials have "discretion." Id. *6-8 & *10. The court suggests the test is whether the language is clear enough that a plan participant can understand that the decision is discretionary. Id.
Herzberger will have an enormous short-term disruptive impact because many plans use language similar to the language Herzberger finds to be an insufficient description of "discretionary" authority. This is particularly disturbing since the common language Herzberger finds insufficient is patterned after an explicit regulation issued by the Department of Labor immediately after the passage of ERISA.
This seminal interpretation of the "discretionary authority" language from ERISA’s definition of a fiduciary, ERISA §3(21)(A), concludes that "a person who performs purely ministerial functions ... is not a fiduciary," 29 C.F.R. §2509-8, Q&A D-2 (Oct. 9, 1975), but that a person or entity "who has the final authority to authorize or disallow benefit payments in cases where a dispute exists as to the interpretation of plan provisions relating to eligibility for benefits" would have sufficient discretion to be a fiduciary. Id., Q&A D-3.
This problem is compounded because retirement plan drafters who have relied on the Department of Labor’s "finality" approach have usually shied away from the use of the term "discretion" whenever possible because of the adverse connotation that the Internal Revenue Service attaches to that term. The situation is even more dismal for many ERISA welfare plans. Many insurance companies and third-party administrators, seeking to avoid the "fiduciary" label, have drafted many ERISA health, life, disability and other welfare plans without even using the Department of Labor’s finality language. Thus many ERISA welfare plans contain language that is indistinguishable from the language Herzberger found to be inadequate.
Although it would be significant solely because of its potential adverse effect on many ERISA plans, Herzberger is even more noteworthy because of Judge Posner’s drafting advice to plan sponsors. In a novel touch, Herzberger spells out language that the judge describes as "safe harbor" language. While specifying that the safe harbor language is not the exclusive way of bringing plan decisions within the protection of the Firestone deferential standard (Id. *8-10), he states that a plan containing the following language will "not be open to being characterized as entitling the applicant for benefits to plenary judicial review of a decision turning him down:"
Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them.
Id. *8.
In the short run, Herzberger will be quite disruptive since the Firestone provisions contained in many ERISA plans flunk the Herzberger explicit "discretion" test. Future courts will have to decide if "finality" language patterned after the Department of Labor’s regulation will pass muster under the stricter, but nonexclusive, standards announced in Herzberger. Of course, this problem can be remedied in the future by plan amendments adding the Herzberger safe harbor language to the conventional "finality" provisions. Thus, over time Herzberger may offer a more reliable test of applicability of Firestone’s deferential standard despite the short-run disruption it creates.
Kelly is a shareholder with Ogletree, Deakins, Murphy, Smith & Polk in Chicago.
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