NOTABLE RECENT DECISIONS IN ERISA LITIGATION

Transcription

1 Washington New York San Francisco Silicon Valley San Diego London Brussels Beijing ERISA & Employee Benefits Litigation * * * * * NOTABLE RECENT DECISIONS IN ERISA LITIGATION November 2008 This advisory surveys a number of issues that arise in employee benefits litigation that have been highlighted by recent court decisions. Plan sponsors and administrators may want to consider how these issues could affect litigation arising from their benefit plans. As discussed below, the resolution of such issues in litigation often turns on the language set forth in plan documents and participant communications. Will Participants Be Required to Exhaust Administrative Remedies Before Filing Lawsuits Alleging Breaches of Fiduciary Duties? ERISA requires both that employee benefit plans have reasonable claims procedures in place and that plan participants avail themselves of these procedures before turning to litigation. As a result, courts generally require plaintiffs bringing claims under ERISA to exhaust administrative remedies provided by a plan before seeking relief from the courts. When plaintiffs allege breaches of ERISA s fiduciary duties, however, such exhaustion has not been consistently required. Some federal appellate courts have ruled that, although plaintiffs who allege violations of plan provisions must exhaust administrative remedies, the same is not required of plaintiffs who allege violations of ERISA s statutory requirements, including its fiduciary duty provisions. Sometimes, whether the appellate court required exhaustion depended on the specific character of the fiduciary breach claim. Other federal appellate courts have declined to distinguish between plan-based and statutory ERISA claims and required exhaustion regardless of the nature of the claim. In some circuits, no appellate precedent has resolved if or when exhaustion is required in cases alleging breaches of fiduciary duty. The exhaustion requirement in the context of fiduciary duty litigation came to the attention to the Supreme Court in LaRue v. DeWolff, Boberg & Associates, Inc., 128 S. Ct (2008). In LaRue, the plaintiff alleged that the defendants violated ERISA s fiduciary duties by failing to implement his investment instructions for his individual account in a defined contribution plan. The Court resolved the primary question presented by holding that a participant may seek to recover the alleged loss to an individual account by suing under ERISA 502(a)(2). The majority opinion also noted that the Court did not decide whether [the participant] was required to exhaust remedies set Significant Issues in Recent Court Decisions Participants may be required to exhaust administrative remedies before filing lawsuits alleging breaches of ERISA s fiduciary duties. In so ruling, the Eleventh Circuit noted that the plan s administrative procedures explicitly applied to claims concerning investments. Several recent court decisions have enforced forum selection clauses in benefit plans. A recent Ninth Circuit decision held, over a dissent, that an ERISA claimant could raise an argument in litigation that had not been presented in the administrative process. The court construed the plan s procedures as not requiring the presentation of all reasons for reconsidering the denial of benefits; The court held that remedy exhaustion was required, but not issue exhaustion. Several appellate decisions since Met. Life v. Glenn have declined to find abuses of discretion in benefit denials, despite administrators structural conflicts of interest. forth in the Plan before seeking relief in federal court pursuant to 502(a)(2). In a concurring opinion, the Chief Justice (joined by Justice Kennedy) also

2 C OVINGTON & B URLING LLP PAGE 2 highlighted that issue by noting that the Court leaves open the question whether exhaustion may be required of a claimant who seeks recovery for a breach of fiduciary duty under 502(a)(2). Recently, in the case of Lanfear v. Home Depot, Inc., 536 F.3d 1217 (11th Cir. 2008), the Eleventh Circuit reiterated its view that exhaustion is required of plaintiffs who allege breaches of ERISA s fiduciary duties. In that case, participants argued that their defined contribution plan s claim procedure for benefits did not apply because their lawsuit sought damages resulting from the diminished value of employer stock in their accounts. The court rejected that argument, holding that any monetary relief to which the plan participants might ultimately be entitled would necessarily constitute benefits. The court also pointed out that the plan s language on the administrative process explicitly encompassed such claims: If a Participant or Beneficiary has any grievance, complaint or claim concerning any aspect of the operation or administration of the Plan or Trust, including but not limited to claims for benefits and complaints concerning the investments of Plan assets, the Participant or Beneficiary shall submit the claim within the applicable limitations period. Finally, because the participants plainly had access to administrative procedures, the court rejected the argument that requiring exhaustion would be futile. The Lanfear decision highlights the significance of plan language concerning required administrative procedures especially language that explicitly encompasses issues relating to Plan investments or other potential allegations of breached fiduciary duties. Furthermore, the Supreme Court s withholding of judgment about the exhaustion requirement in fiduciary duty cases also suggests its importance and viability in a range of cases. Plan sponsors may want to consider amending plan provisions to specify an exhaustion requirement that explicitly encompasses fiduciary breach allegations, and defendants in such cases should consider invoking the requirement whenever such processes have not been exhausted before litigation. Do Your Benefit Plans Select a Venue for ERISA Lawsuits? Many employee benefit plans contain provisions specifying or limiting the choice of forum for ERISA litigation. A recent district court decision illustrates the operation of such a forum selection clause and an apparent trend to enforce them. In the case of Gipson v. Wells Fargo & Co., 563 F. Supp. 2d 149 (D.D.C. 2008), the court ordered the transfer of a lawsuit from the District of Columbia to Minnesota. The plaintiff in Gipson had been employed by Wells Fargo in Maryland and participated in its defined contribution plan. She filed a lawsuit in D.C. alleging that the defendants breached fiduciary duties in selecting certain investment options for the plan. That plan is administered by Wells Fargo staff in Minnesota, where the trustee also is located. The plan documents include a forum selection clause, which requires that all controversies, disputes and claims arising under the plan be submitted to the United States District Court for the District of Minnesota. In response to the lawsuit, the defendants moved to dismiss the case or to transfer it to Minnesota. According to the court, either D.C. or Minnesota would be a permissible forum under ERISA. The court recognized, however, that forum selection clauses are presumed to be enforceable. It rejected the plaintiff s contentions that the plan s forum selection clause was unreasonable and unjust, and that transfer should be foreclosed because ERISA precedent that would be applied in Minnesota would be less favorable to her. The Court then conducted the analysis required by the statute authorizing transfers of civil cases. That analysis weighed the plaintiff s interest in the D.C. forum, where she resided, against these countervailing factors: the relatively few participants in D.C. (especially compared to Minnesota), the plan s forum selection clause, the fact that the claim predominately arose in Minnesota where the plan was administered, and the location of most evidence and witnesses in Minnesota. Among those factors, the court emphasized the forum selection clause: [S]ubstantial weight should be given to Wells Fargo s choice of forum, as reflected in the terms of the Plan. A forum selection clause is a clear indication of venue preference and is in some sense an ex ante agreement to waive venue objections to a particular forum.

3 C OVINGTON & B URLING LLP PAGE 3 Here, the Plan forum selection clause weighs strongly in favor of transfer to the District of Minnesota. The interests of justice and efficiency, moreover, encourage the enforcement of the forum selection clause and reliance on a single body of law to resolve disputes [concerning the plan]. Several other recent district court decisions also have relied on forum selection clauses in benefit plans as bases for transferring ERISA cases. The addition of the Gipson decision to that trend again demonstrates the value of such clauses. What Issues Must a Participant Present to Exhaust Administrative Remedies? When a participant files a lawsuit after exhausting administrative remedies, can that participant make arguments in court that were not presented in the claims process? That question was recently addressed by the Ninth Circuit in Vaught v. Scottsdale Healthcare Corporation Health Plan, 2008 WL (9th Cir. 2008). Surprisingly, the appellate court ruled (over a dissent) that the plaintiff should have been allowed to make arguments in the lawsuit that he did not make during his administrative appeals. The plaintiff in Vaught was injured in an accident while riding his motorcycle; a blood test revealed alcohol at three times the legal limit for a vehicle operator. He sought reimbursement for his medical expenses from his employer-provided health care plan. The administrator denied the claim with an explanation of benefits (EOB) that referred to the plan s exclusion for alcohol-related vehicle accidents. The plaintiff appealed the denial, pointing to alleged ambiguities and deficiencies in the EOB notice. The plan s administrative remedies were exhausted when two stages of review upheld the denial of benefits. The plaintiff then sued for benefits in federal court. In litigation, he argued for the first time that his injuries were not caused by alcohol, as defined by the exclusion. The district court granted summary judgment against the plaintiff, because he had not made this argument during the administrative process. On appeal, however, the Ninth Circuit held that the plaintiff had satisfied the exhaustion requirement and reinstated the lawsuit. The Ninth Circuit first examined the description of the internal review process in the EOB notice, which the court deemed to be incorporated into the summary plan description (SPD) by reference. The EOB notice stated that a claimant s appeal must explain the reason why you think the Claims Administrator should reconsider your claim. The court ruled that a person of average intelligence and experience could understand this requirement to be satisfied by pointing as the plaintiff did solely to alleged procedural defects in the denial of benefits. The court also ruled that the phrase the reason why could be construed as limiting the appeal to presentation of a single reason. Next, the court compared employee benefits appeal processes in general to procedures for appealing denials of Social Security benefits. In Social Security cases, claimants are required to show remedy exhaustion (all appeals have been pursued) but not issue exhaustion (all arguments have been made). The court reasoned that ERISA procedures are similar to Social Security procedures because both involve impartial decision makers in nonadversarial settings, and claimants in both often lack attorneys. The court further stated that [t]he Plan s failure to notify claimants of any issue-exhaustion requirement also weighs against imposing one. One member of the three-judge panel dissented. According to the dissenter, the decision allows an ERISA claimant to engage in a court-sanctioned game of Texas Hold Em against a Plan playing with all of its cards face up waiting until his action in district court and after the Plan Administrator has stopped playing, to play his trump card: the real reason he challenges his plan s denial of coverage. The Vaught decision raises several issues for consideration by plan sponsors and administrators who design and administer benefit claim procedures. First, it is notable that the court focused exclusively on the description of the procedures in the EOB notice. The court did not mention any provisions of the plan document governing such procedures. Second, the court ruled that a stated requirement to explain the reason for reconsideration would not be understood by an average claimant to require the appeal to present all the claimant s arguments against denial. It appears from the court s reasoning that the outcome could have differed if the appeal procedures had explicitly required the claimant to present any and all reasons that benefits should be paid.

4 C OVINGTON & B URLING LLP PAGE 4 How Will Structural Conflicts of Interest Affect Judicial Review of Benefit Determinations by Plan Administrators? In a much-publicized decision at the end of last Term, Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct (2008), the Supreme Court ruled that a plan administrator s dual role in both evaluating and paying benefit claims (whether as an employer or as a third party such as an insurer) creates a conflict of interest that must be considered as a factor by a court reviewing a denial of benefits. The Court also held that the significance of such a conflict and the resulting weight of the factor will depend upon the circumstances. So far, the early returns from the lower courts after Glenn provide little basis for assessing what its longterm impact will be in practice. It appears, however, that any concerns that Glenn would virtually eliminate deferential judicial review (despite the Court s disavowal of that intention) were exaggerated. At the appellate level, for example, the Eighth Circuit recently decided that a disability benefit denial in a particular case would be upheld even though the administrator had a structural conflict of interest. Taking into account the remaining factors there is not a sufficiently close balance for the conflict of interest to act as a tiebreaker in favor of finding that UNUM abused its discretion. Wakkinen v. UNUM Life Ins. Co., 531 F.3d 575 (8th Cir. 2008). Similarly, the Eleventh Circuit ruled in a decision after Glenn that an administrator s structural conflict in a particular disability case had little significance and affirmed the denial of benefits under the abuse of discretion standard. Doyle v. Liberty Life Assur. Co., 542 F.3d 1352 (11th Cir. 2008). Notably, the Ninth Circuit recently rejected some of its pre-glenn precedents and held that, even when a plan s benefits are paid out of a trust rather than directly by the employer itself, the employer s role as administrator created a conflict of interest that must be considered as a factor during judicial review. Burke v. Pitney Bowes Inc. Long-Term Disability Plan, 2008 WL (9th Cir. 2008). The court reasoned that the employer s funding of the disability plan trust (along with employee contributions) raised many of the same conflict concerns as direct benefit payments, although on balance creating less of a conflict than the typical dual-role plan. The appellate court remanded the case to the district court to determine the significance of the conflict as a factor under the facts of the case. * * * * * Covington handles the full range of litigation, audits, investigations, and government enforcement actions involving employee benefit plans. Our experienced ERISA litigators draw on the technical skills of one of the best advisory practices in the country to produce exceptional results for our clients. We also provide creative pre-litigation and settlement advice to reduce the risks and costs of litigation.

5 C OVINGTON & B URLING LLP PAGE 5 Senior Members of Covington s ERISA & Employee Benefits Litigation Group Eric C. Bosset ebosset@cov.com Caroline M. Brown cbrown@cov.com Thomas (T.L.) Cubbage tcubbage@cov.com Roderick A. De Arment rdearment@cov.com Julie M. Edmond jedmond@cov.com Holly B. Fechner hfechner@cov.com Robert P. Haney, Jr rhaney@cov.com Jeffrey G. Huvelle jhuvelle@cov.com Robert A. Long rlong@cov.com Amy N. Moore amoore@cov.com Robert S. Newman rnewman@cov.com Richard C. Shea rshea@cov.com Eric R. Sonnenschein esonnenschein@cov.com John M. Vine jvine@cov.com Robert D. Wick rwick@cov.com Thomas S. Williamson, Jr twilliamson@cov.com This memorandum provides general information, not legal advice as to any specific matter. It cannot be used for the purpose of avoiding penalties and should not be used as a substitute for appropriate legal advice. Covington & Burling LLP is an international law firm dedicated to solving clients' business, regulatory, and trade problems by providing advice on sophisticated transactions and advocacy in complex litigation, arbitration, and government matters. Founded in 1919, the firm has more than 600 lawyers in Washington, New York, San Francisco, Silicon Valley, San Diego, London, Brussels, and Beijing Covington & Burling LLP. All rights reserved.