2. Circuits Split on National Contacts Personal Jurisdiction Issue.

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1 ERISA UPDATE TOP 10 ISSUES FOR PRACTITIONERS Jeffrey Lewis Sigman, Lewis & Feinberg, PC Erin M. Sweeney Paul Hastings Janofsky & Walker, LLP (510) (202) The Supreme Court Takes On Nonfiduciary Liability. In Harris Trust v. Salomon Brothers, 184 F.3d 646 (7th Cir. 1999), certiorari granted, 120 S. Ct. 784 (2000), Salomon, a non-fiduciary, sold to a pension plan certain Fee Agreements entitling the plan to fees generated by net cash flows from the operation of certain motels and to fees based on the appreciation of properties on which the motels were situated. The Fee Agreements proved nearly worthless, and the plan lost almost $20 million of the nearly $21 million it had paid. Salomon, on the other hand, which had zero basis in the Agreements, made a profit of almost $21 million on the sales to the plan. In contrast to the six other circuits which had considered the issue, the Seventh Circuit held that Salomon, a non-fiduciary party in interest, could not be sued to remedy a prohibited transaction under ERISA. In so holding, the Seventh Circuit focused on the language of Section 406(a), which provides that [a] fiduciary... shall not cause the plan to engage in a transaction.... The court concluded that by this language, Congress intended to prohibit only fiduciaries from entering into prohibited transactions. Other circuits and plaintiff in Salomon rely, instead, on the fact that Section 502(a)(3) provides a cause of action for equitable or injunctive relief to correct any violation of the statute, and does not, by its terms, limit such claims to claims brought against fiduciaries. The case has been briefed and argued before the Supreme Court, but not decided as of the date these materials have been prepared. 2. Circuits Split on National Contacts Personal Jurisdiction Issue. In Peay v. BellSouth Medical Assistance Plan, 205 F.3d 1206 (10th Cir. 2000), the Tenth Circuit rejected the proposition that because ERISA contains a nationwide service of process provision, the only minimum contacts required for a district court to exercise personal jurisdiction over a defendant are minimum contacts with the United States as a whole. The Peay court held that where jurisdiction is invoked based on nationwide service of process, the Fifth Amendment requires the plaintiff s choice of forum to be fair and reasonable to the defendant. Every circuit addressing the issue prior to Peay had upheld the national contacts personal jurisdiction test based on minimum contacts with the United States as a whole. See also Board of Trustees v. Elite Erectors, Inc., 2000 U.S. App. LEXIS (7th Cir. May 16, 2000) (discussing Peay, but adopting majority view). 1

2 3. Disability Pension Plan Provisions Are Welfare Benefits. In Rombach v. Nestle USA, Inc., 2000 U.S. App. LEXIS 8274 (2d Cir. April 28, 2000), Nestle sponsored a pension plan that provided a disability pension plan benefit based in part on constructive credit for years an employee would have worked but for the disability. In 1990, Nestle and Rombach s union agreed to eliminate the constructive credit provision. Rombach, who applied for, and received a disability pension in 1995, claimed entitlement to a pension benefit calculated based on the pre-1990 disability pension formula. Rombach argued that the elimination of the constructive credit constituted an impermissible reduction in accrued pension benefits under Section 204(g). The court disagreed, holding that to the extent that Nestle s Pension Plan provides benefits that are triggered by disability, that portion of the plan is a welfare plan... Accordingly, the court held that elimination of the constructive credit was not subject to Section 204(g). 4. When is a Proposal Under Serious Consideration? Courts continue to deal with the issue of the circumstances under which an employer must disclose the fact that it is considering adopting a new employee benefit plan or improving an existing plan. In Wayne v. Pacific Bell, 189 F.3d 982 (9th Cir. 1999), the Ninth Circuit held that an employer s offer of a specific proposal in collective bargaining could constitute serious consideration of that proposal within the meaning of that phrase as articulated by the Third Circuit in Fischer v. Philadelphia Electric Co., 96 F.3d 1533 (3d Cir. 1996). The court also relied on Drennan v. General Motors Corp., 977 F.2d 246 (6th Cir. 1992). The Ninth Circuit rejected defendant s argument that requiring disclosure would undermine collective bargaining. Although not expressly addressing the issue, the court also implicitly agreed with holdings of other circuits that the proposal finally adopted need not be identical to that which was under serious consideration. One other aspect of Wayne, however, is open to question. Specifically, the court held that defendant had an affirmative duty to disclose its serious consideration of the improved early retirement incentive program at issue, apparently notwithstanding the fact that affected employees did not make any inquiry about future benefit improvements after the time the proposal was under serious consideration. In so holding, the Ninth Circuit relied on its decision in Bins v. Exxon, 189 F.3d 929 (9th Cir. 1999), issued the same day. However, the court later granted reconsideration en banc in Bins. Bins has been briefed and argued, but not decided, as of the date these materials have been prepared. If the Ninth Circuit reaffirms the panel holding and rationale in Bins, it will be going farther than any other circuit court in requiring serious consideration. The court could, however, reach the same result as the panel, but without going as far conceptually. Although plaintiffs in Bins did not inquire about the possibility of improved benefits after the proposal at issue was under serious consideration, they had inquired about such a possibility shortly before serious consideration occurred, in contrast to other reported cases in which claims have been rejected, the employees were still employed by Exxon at the time of serious consideration. The consequences of a an employer s failure to ERISA-ize the early retirement incentive 2

3 program which it ultimately adopted were demonstrated in Radowicz v. Massachusetts Mutual Life Ins. Co., 192 F.3d 162 (1st Cir. 1999). The First Circuit held that defendant s one-time lump sum payment to employees choosing to retire early was not an ERISA plan under Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987). Consequently, some of plaintiffs Massachusetts common law claims for misrepresentation, which were triable to a jury and did not require proof of serious consideration in order to demonstrate materiality, should have been allowed to proceed to trial. 5. Fiduciary Duty to Provide Information. A fiduciary may be required to warn an affected participant that the plan administrator interprets an ambiguous plan provision to limit plan benefits provided to the participant at the time the provision is applied to the participant. In Harte v. Bethlehem Steel Corp., 2000 U.S. App. LEXIS (6th Cir. May 26, 2000), an employee ( Harte ) became disabled in 1986 after working for Bethlehem Steel for 13 years. Harte applied for, and received, long term disability benefits. Harte did not apply for worker s compensation benefits. Under the Bethlehem Steel pension plan, a participant sustains a break in service two years after a participant leaves Bethlehem Steel as a result of layoff or disability. However, no break in service occurs if the participant leaves Bethlehem Steel due to a compensable disability incurred during course of employment. The plan administrator treated Harte as sustaining a break in service in 1988, two years after Harte filed for long term disability benefits, because the plan administrator consistently interpreted the compensable disability provision to apply only to former employees receiving worker s compensation benefits, not to former employees receiving long term disability benefits. Accordingly, the plan administrator concluded that Harte earned 14 years, 11 months, and 11 days of continuous service for Bethlehem Steel and that Harte was 19 days short of receiving enhanced pension benefits. In 1995, Harte learned that the plan administrator had concluded that he was not entitled to enhanced pension benefits in Harte subsequently brought a breach of fiduciary duty action, claiming that Bethlehem Steel had a fiduciary duty to advise him that Bethlehem Steel interpreted the phrase compensable disability to exclude long term disability. The en banc court agreed, holding that [i]t follows that when a material plan provision regarding severance is interpreted in a manner such that beneficiaries might predictably and reasonably rely on an alternate interpretation, a fiduciary may be held liable for failing to inform a beneficiary that his service has been broken in a timely manner, i.e., at or near the time his service was broken (so that he might attempt to protect himself). A fiduciary may also have a duty to provide information about all benefits conceivably requested by a participant or a beneficiary. In Palen v. Kmart Corp., 2000 U.S. App. LEXIS (6th Cir. May 9, 2000), a participant ( Daneli ) requested information regarding continuing his benefits in his exit interview. Daneli asked his girlfriend and beneficiary ( Palen ) to contact Kmart concerning the continuation of all his benefits while he traveled out of town for training in St. Louis for his new position. Although Palen diligently requested information regarding continuation of Daneli s benefits from Kmart representatives, she was told that Daneli s COBRA package was not yet available, and 3

4 would be provided to her shortly. In the interim, Daneli was hospitalized at home in Michigan, but traveled back to St. Louis to complete his training. Daneli was hospitalized in St. Louis for a week upon his return. Eventually, Palen received the COBRA package, and paid all required premiums. Shortly thereafter, Daneli was admitted to a hospital and lapsed into a coma. When an employee at Daneli s new employer suggested that Palen request conversion of Daneli s life insurance policy, Palen telephoned Kmart seeking life insurance conversion information. Kmart representatives advised Palen that the date for converting life insurance coverage had passed. Several days later, Daneli died. Palen brought suit for breach of fiduciary duty, claiming that Kmart had a duty to provide Palen with life insurance conversion information when she requested information regarding continuation of all of Daneli s benefits. Kmart defended on the grounds that Daneli received a summary plan description containing the life insurance conversion deadline, and that Daneli was capable of making the decision to convert the life insurance coverage during the 30 day period. Kmart also argued that Daneli was aware of his life insurance conversion rights as a result of his exit interview and the fact that Daneli had conducted exit interviews which required him to provide information regarding life insurance conversion rights to departing employees. The court held that Kmart breached its fiduciary duty. When Ms. Palen communicated Mr. Daneli s desire to continue all of his benefits, Kmart became obligated to disclose all material information, including information that Ms. Palen had not specifically requested. In our view, Kmart breached this duty when it responded to Ms. Palen s inquiries by providing information about health insurance only, without a word about continuation of Mr. Daneli s life insurance. The court went on to hold that prior communication of plan details does not relieve an ERISA fiduciary of its obligation to respond fully and accurately to a beneficiary s request for information. 6. One Plan or Multiple Plans? In Deboard v. Sunshine Mining & Refining Co., 208 F.3d 1228 (10th Cir. 2000), plaintiffs retired pursuant to an early retirement incentive offer. In letters regarding that offer, the employer promised, among other things, lifetime medical coverage. After the company was sold, the successor attempted to require the retirees to pay the full premium for coverage. When plaintiffs brought suit seeking to enforce the promise of lifetime benefits, defendant argued that the promise made in the letter was no more than a recitation of the retirees rights under the former company s then-existing plan. The employer further argued that because the SPD for the that plan contained a reservation of rights clause, the benefits could be modified or eliminated. The Tenth Circuit, however, held that the letters constituted a plan separate and apart from the former company s existing plan. As a result, the reservation of rights in the existing plan s SPD was inapplicable. The court s analysis differs dramatically from that of the Sixth Circuit in Sprague v. General Motors Corp., 133 F.3d 388, 401 (6th Cir.) (en banc), cert. denied, 524 U.S. 923 (1998), where, among other things, the court held that promises made to employees in early retirement offers were not separately enforceable, but were subject to the terms of the then-existing plan. The Tenth Circuit did not mention Sprague in this aspect 4

5 of its opinion. (The Tenth Circuit discussed Sprague only in the course of its alternative holding that the reservation of rights clause was ambiguous -- it distinguished the SPD s language from that which the Sixth Circuit held unambiguous in Sprague.) 7. Other Appropriate Equitable Relief Developments. In Strom v. Goldman Sachs & Co., 202 F.3d 138 (2d Cir. 1999), an employee of Goldman, Strom was entitled to obtain $1 million in life insurance upon submission of an application to the insurer. Due to errors by Goldman, his application was not submitted until August 13, rather than many months earlier, with the result that $500,000 of his coverage did not become effective until September 1. He died on August 28. The insurer would not pay the $500,000. The Second Circuit upheld dismissal of Strom s widow s claim for benefits from the insurer under Section 502(a)(1)(B). However, the appeals court reversed the district court s dismissal of her Section 502(a)(3) claim against Goldman. Breaking with other circuits (see, e.g., next case below), the Second Circuit held that Strom s widow could maintain a claim for the $500,000 as a claim for equitable relief against Goldman, notwithstanding that Goldman was not unjustly enriched. The court based its analysis on the fact that Goldman was alleged to have breached its fiduciary duty in failing to properly process the application, and that the ability to make participants whole for such breaches was historically within the jurisdiction of the equity courts. The court distinguished Mertens v. Hewitt Associates, 508 U.S. 248 (1993), although some critics of the Strom opinion have argued that the distinction was unconvincing. The Second Circuit also found support for its position in the fact that the phrase other equitable relief in Section 502(a)(3) is identical to that used by Congress in amending the Civil Rights Act, which allows recovery of back pay,... or any other equitable relief. The court held that back pay was analytically no different from the relief sought by Strom s widow. In Kerr v. Vatterott & Co., 184 F.3d 938 (8th Cir. 1999), Kerr alleged that the plan fiduciary breached its duty by delaying distribution to him of his vested account balance for over three years. He sought to recover the amount of money he could have earned on the undistributed amount. The Eighth Circuit held that he could not obtain such a remedy under Section 502(a)(3), however, because when he ultimately was paid, his account was properly credited with its share of the plan s earnings. Consequently, reasoned the court, there was no unjust enrichment, Kerr s claim must be characterized as one for compensatory damages, and such damages are not recoverable under Section 502(a)(3), as interpreted by Supreme Court in Mertens. 8. Physician Incentive Disclosure Claims. In Shea v. Esensten, 208 F.3d 712 (8th Cir. 2000) ("Shea II"), the Eighth Circuit held that a state law claim that a physician failed to disclose a conflict of interest created by his financial relationship with an ERISA entity was not preempted. The doctor had not referred Shea to a cardiologist despite his request for a referral. Shea died from his heart condition. In an earlier decision, the same court had held that the plaintiff, Shea s widow, could proceed under ERISA with a claim against the HMO for breach of fiduciary duty for failing to disclose the same 5

6 incentives. Shea v. Esensten, 107 F.3d 625 (8th Cir.), cert. denied, 522 U.S. 914 (1997) ("Shea I"). In Shea II, the court distinguished the situation from that at issue in Shea I because the defendants in Shea II were not fiduciaries. In contrast, in Ehlmann v. Kaiser Foundation Health Plan of Texas, 198 F.3d 552 (5th Cir. 2000), the Fifth Circuit held that an HMO did not have a fiduciary duty to disclose its compensation arrangements with doctors who provided services to HMO members. The court characterized plaintiffs claim as one which would impose the disclosure duty as a general rule, rather than in situations (such as Shea) where a specific inquiry or other special circumstances were involved. Although it is not a case which directly raises a preemption issue, Herdrich v. Pegram, 154 F.3d 362 (7th Cir. 1998), awaiting the decision of the Supreme Court (which granted certiorari and heard argument), may impact preemption in this area. In Herdrich, the district court held preempted plaintiff s state law claims against physicians and an HMO owned by them for failing to disclose that ownership and failing to disclose financial incentives. Plaintiff then amended the complaint and set forth those same claims as breach of fiduciary duty claims under ERISA. The district court dismissed, but the Seventh Circuit reversed, holding that the physicians and HMO could be liable as fiduciaries under ERISA. The forthcoming Supreme Court decision as to that issue may bear on the preemption issue in any one of several ways: the Court might say something about preemption in the course of addressing the fiduciary status issue, the Court s ruling on the fiduciary status issue might have implications for preemption even without any discussion of preemption, or the Court might directly rule on preemption (as urged by amici who have asked the court to rule sua sponte on whether the district court ever had jurisdiction). 9. Conflict of Interest Standard of Review Developments. The Circuit courts continue to implement their various "conflict of interest" tests. This test is triggered if the plan grants an administrator discretion to interpret the terms of the plan B which subjects the administrator s decision to "arbitrary and capricious" or "abuse of discretion" review B but the claimant argues that the standard of review should be de novo because the fiduciary is operating under a conflict of interest. The past year s developments are summarized below: Plan language providing that "benefits shall be paid when the plan administrator upon proof (or satisfactory proof) determines that the applicant is entitled to [benefits]" does not confer discretion upon the administrator. Herzberger v. Standard Ins. Co., 205 F.3d 327 (7th Cir. 2000). The fact that an insurance carrier served as both plan administrator and plan insurer does not entitle a claimant to de novo review as a matter of law. According to the Second Circuit, the dual role is only a factor to consider in determining whether the administrator was "in fact influenced by the conflict of interest". Pulvers v. First UNUM Life Ins. Co., 210 F.3d 89 (2d Cir. 2000) (citation omitted). 6

7 The Fourth Circuit clarified that the appropriate standard of review for discretionary decisions made by plan administrators is "abuse of discretion", not "arbitrary and capricious". The Fourth Circuit further clarified that an arbitrary and capricious standard is more deferential to the administrator than an abuse of discretion standard. Booth v. Wal-Mart Stores Inc. Associates Health & Welfare Plan, 201 F.3d 335 (4th Cir. 2000). In Tremain v. Bell Indus., Inc., 196 F.3d 970 (9th Cir. 1999), the Ninth Circuit permitted the claimant to introduce evidence outside the administrative record B including wage information and evidence that the administrator utilized an incorrect plan s definition of disability B to show that the administrator s decision to deny benefits was affected by the administrator s conflict of interest. If a plan fails to reserve discretion to the administrator, both plan interpretation and factual determinations are reviewed de novo. Kinstler v. First Reliance Standard Life Ins. Co., 181 F.3d 243 (2d Cir. 1999); Walker v. American Home Shield Long Term Disability Plan, 180 F.3d 1065 (9th Cir. 1999). 10. Contingent Workforce Update. The United States District Court for the Southern District of New York denied a motion to dismiss filed by various Time Warner entities ("Time Warner") in the closely-watched Herman v. Time Warner, Inc., case, reported at 56 F. Supp. 2d 411 (S.D.N.Y. 1999). The Department of Labor ("DOL") sued Time Warner on the grounds that Time Warner improperly classified a number of individuals performing services for Time Warner as "independent contractors" and "temporary employees" who should have been classified as employees eligible for Time Warner employee benefits. Time Warner moved to dismiss the Complaint on the grounds that DOL lacked standing to sue because the DOL may only bring actions for breach of fiduciary duty and the Time Warner case essentially states a claim for benefits. The court rejected Time Warner s argument, holding that DOL sufficiently alleged that Time Warner breached its fiduciary duties by misclassifying individuals as independent contractors and temporary employees. The court went on to hold that just because the misclassified individuals may have been denied benefits does not mean that the plans were not also harmed. The court also articulated a policy reason for denying the motion to dismiss: "if the allegations of the complaint are true, governmental action is appropriate here. Misclassified employees, for example may not even know that their rights under ERISA might have been violated, a great many employees may have been affected, and the public also may have a strong interest in the issues present. Under these circumstances, it makes sense for the government to bring suit." Also in the closely-watched category, the Supreme Court denied certiorari to the most recent Vizcaino decision which left standing the Ninth Circuit s decision on mandamus directing the district court to reinstate the original class definition, and directing the district court to vacate 7

8 two orders limiting the definition of the plaintiff class. Vizcaino v. United States District Court for the Western District of Washington, 173 F.3d 713 (9th Cir. 1999) cert. denied, 2000 U.S. LEXIS 479 (2000). 8