Court Rules Same-Sex Spouse Entitled to Survivor Annuity under ERISA Profit Sharing Plan

After Sarah Ellyn Farley began working at a law firm in 2004, she became a participant in the firm’s profit sharing plan.  In 2006, Farley married Jean Tobits in Toronto, Canada, as authorized under Canadian law. Shortly after her wedding, however, Farley was diagnosed with cancer and died in 2010.

The profit sharing plan required that, on the death of a participant, the plan administrator had to pay death benefits in the form of a qualified pre-retirement survivor annuity in accordance with ERISA and the Internal Revenue Code (IRC). After Farley’s death, both Tobits and Farley’s parents submitted a claim for the annuity.  The law firm brought an interpleader action to determine who was entitled to the money due under the plan. The key issue for the court to decide was whether the U.S. Supreme Court’s decision in United States v. Windsor, declaring Section 3 of the federal Defense of Marriage Act (DOMA) unconstitutional as a deprivation of the equal liberty of persons protected by the Fifth Amendment to the U.S. Constitution, required recognition of a valid Canadian same-sex marriage for purposes of benefits distribution pursuant to ERISA, a federal statute. 

The court explained that the plan language required that death benefits be paid to a participant’s surviving spouse upon the death of the participant. The plan also provided that a participant could designate a beneficiary other than his or her spouse to receive the death benefits; however, if the participant had a spouse, the spouse first had to waive his or her rights to be the participant’s beneficiary before the designation of another beneficiary could be deemed valid. In the event there was no valid beneficiary – spouse or otherwise – the plan’s default provisions required that the death benefits would be paid in the following order of priority: first to the participant’s surviving spouse, and then to the participant’s surviving parents.

Tobits was not listed as Farley’s beneficiary; thus, if Tobits was not Farley’s surviving spouse, she had no rights to the death benefits under the plan. The court then considered whether she was Farley’s surviving spouse for purposes of the plan.

The court explained that because “spouse” was undefined in the plan, it had to look to ERISA and the IRC for those definitions.  It noted that, for purposes of ERISA and the IRC and thousands of other regulations, DOMA, by operation of its Section 3, restricted any reference to “spouse” to mean only opposite-sex spouses. 

The court then explained that, in United States v. Windsor, the U.S. Supreme Court had considered whether Edith Windsor, a New York resident who married her late-wife, Thea Spyer in 2006 in Canada, qualified for a federal estate tax exemption as a surviving spouse in light of Section 3 of DOMA. The court explained that Windsor held that because the State of New York recognized same-sex marriages as valid – in that case, the Canadian marriage of Windsor and Spyer – DOMA unlawfully deprived those couples of the equal liberty that was protected by the Fifth Amendment. Thus, the court ruled, following Windsor, the term “spouse” was “no longer unconstitutionally restricted to members of the opposite sex, but now rightfully includes those same-sex spouses in ‘otherwise valid marriages.'”

The court then found that there was “no doubt” that Tobits was Farley’s surviving spouse under the plan in light of the Supreme Court’s decision in Windsor. It noted that Tobits and Farley were married in Toronto, Canada in 2006, just a year before Windsor and Spyer wed in Ontario. Post-Windsor, the court found, where a state recognized a party as a surviving spouse, the federal government had to do the same with respect to ERISA benefits, “at least pursuant to the express language of the ERISA-qualified [plan] at issue [in this case].”

The court added that there could be “no doubt” that Illinois, the couple’s place of domicile, would consider Tobits to be Farley’s surviving spouse. The court then stated that Windsor made clear that where a state has recognized a marriage as valid, the U.S. Constitution required that the federal laws and regulations acknowledge that marriage. In light of that, the court ruled that Tobits was Farley’s spouse pursuant to the terms of the plan, and that she was entitled to the death benefits payable after Farley’s death. [Cozen O’Connor v. Tobits, 2013 U.S. Dist. Lexis 105507 (E.D. Pa. July 29, 2013).]

Federal Circuit Court Reverses Approval of Out-of-Court Settlement of FLSA Suit Reached by Plaintiff without Her Counsel

The plaintiff in this case worked for Mal-Motels, Inc., as a front desk clerk and night auditor. She alleged that the motel’s owner asked her to stop using a time clock to keep track of the hours she worked and that, instead, he would pay her a salary of $8.75 per hour. The plaintiff alleged that she started verbally reporting her hours to the motel’s owner as he had requested, and that he would call in her hours to a payroll company, which would issue a paycheck based on what he reported to it.

The plaintiff claimed that she “periodically” worked more than 40 hours per week but was not paid one and one-half times her regular hourly wage for that overtime work, in violation of the federal Fair Labor Standards Act (FLSA). She contended that Mal-Motels owed her at least $3,780 in unpaid overtime, plus another $3,780 in liquidated damages under the FLSA, for a total of $7,560.

For those figures, the plaintiff relied on the motel’s guest registration logs, which, she argued, showed that she worked more than 40 hours per week. Mal-Motels conceded that it owed the plaintiff some unpaid overtime (which also would mean some liquidated damages), but it disputed the number of hours that she worked and the amount of damages owed.

The plaintiff quit her job at Mal-Motels because she was not being paid for her overtime. She obtained an attorney and he filed a lawsuit on her behalf against Mal-Motels and its owner, claiming a violation of the FLSA. The owner, without the assistance of an attorney, filed an answer for himself and for Mal-Motels. That answer was stricken and a default entered as to Mal-Motels because the owner, as a non-lawyer, could not represent it in the lawsuit.

Thereafter, still acting without an attorney, the owner called the plaintiff about settling her lawsuit.  The two of them agreed to meet at the motel.  The owner told plaintiff not to bring her attorney and she did not.  The two of them met and reached a settlement. Toward that end, the plaintiff signed a voluntary dismissal with prejudice of her complaint and a letter to her attorney informing him that the case had been settled.

The voluntary dismissal document that the plaintiff had signed was filed with the district court, but the judge issued an order stating that because the plaintiff’s complaint had been filed by an attorney and she had not received permission to appear without that attorney, her own voluntary dismissal with prejudice had “no effect” and the complaint remained “pending.”

Shortly thereafter, the motel owner hired a lawyer to represent him and Mal-Motels in the case. The lawyer filed a motion to set aside the default as to Mal-Motels, which the district court granted. The lawyer also filed a “motion to enforce the settlement agreement.” A magistrate judge held an evidentiary hearing on that motion, at which the plaintiff’s lawyer objected to the settlement.  The magistrate judge then issued a report recommending that the district court approve the settlement and dismiss the case with prejudice because the agreement that the plaintiff and the motel’s owner had reached was “a fair and reasonable resolution of a bona fide dispute under the FLSA.” The district court adopted the magistrate judge’s report and recommendation, overruled the plaintiff’s objections to it, and dismissed her complaint with prejudice. The plaintiff appealed to the U.S. Court of Appeals for the Eleventh Circuit.

In vacating the district court’s decision, the circuit court explained that there are limits on the ability of private parties to settle FLSA lawsuits. It explained that permitting an employer to secure a release from a worker not represented by counsel who needed his or her wages promptly would tend to “nullify the deterrent effect” that Congress intended that the FLSA should have. The circuit court added that, given the often great inequalities in bargaining power between employers and employees, mandatory protections were needed to ensure that an employer, who had a strong bargaining position, did not take advantage of an employee. According to the circuit court:

Allowing the employer to escape liquidated damages by simply giving an employee the wages she was entitled to earn in the first place — or in some cases, less than that — would undermine the deterrent effect of the statutory provisions.

The circuit court then ruled that the proposed settlement in this case should not be approved. It explained that the proposed settlement was not made under the supervision of the Secretary of Labor, which would have allowed it to be approved even in the absence of the plaintiff being represented by counsel. Finally, it said, the proposed settlement did not qualify as a “stipulated judgment” because the plaintiff’s lawyer had objected to its approval at the hearing held before the magistrate judge, contending that the terms were not fair and reasonable. [Nall v. Mal-Motels, Inc., 2013 U.S. App. Lexis 15378 (11th Cir. July 29, 2013).]

Court Permits Disability Plan Administrator to Pursue Overpayment Received by Plan Participant

The plaintiff in this case was a participant in a long term disability policy that provided her with benefits of $3,605 per month less applicable set-offs, which included the amount of Social Security disability benefits the participant received. The policy provided the plan administrator with the right to recover benefits paid to a participant in excess of the benefits due under the plan, including by reducing future benefits payments or by pursuing appropriate collection activity. The plaintiff also signed a reimbursement agreement to the same effect, agreeing to reimburse the plan administrator for any overpayment within 30 days of receiving other benefits that qualified for set-off.

The plaintiff received long term disability benefits under the policy for more than two years.  She later was awarded Social Security disability benefits.  After her benefits under the policy were terminated, she sued the plan administrator, which filed a counterclaim contending that the Social Security disability benefits awards created an overpayment in long term disability benefits and that it was entitled to recover this overpayment through an equitable lien on the plaintiff’s property. The plaintiff moved to dismiss the counterclaim.

The court denied the plaintiff’s motion.  In its decision, the court explained that the plan administrator could bring a claim for reimbursement pursuant to an equitable lien by agreement under ERISA Section 502(a)(3). The “relief sought” must be “equitable,” the court continued (that is, recovery of specifically identifiable funds held by the plaintiff) and not “legal” (that is, the imposition of personal liability on the plaintiff for the benefits that the health plan had conferred on her).

The court first found that the policy and the reimbursement agreement identified the specific fund from which the plan administrator sought recovery (that is, the long term disability benefits that were paid to the plaintiff) and the specific share of that fund to which the plan administrator was entitled (that is, the amount of overpayment resulting from receipt of Social Security disability benefits). 

The court then rejected the plaintiff’s contention that the plan administrator’s claim had to fail because the plan administrator had not alleged that those funds remained in her possession. The court ruled that a possession requirement for a plan administrator’s overpayment claim was not required and that these claims were equitable in nature even if the benefits paid to the plaintiff were not specifically traceable to her current assets because of commingling or dissipation.

The court also rejected the plaintiff’s argument that ERISA’s protection of Social Security benefits from “execution, levy, attachment, garnishment, or other legal process” prohibited the plan administrator’s claim, explaining that the plan administrator was “not seeking to impose a lien directly on” her Social Security benefits. Rather, the court reasoned, although the amount sought by the plan administrator was the same as the amount of the plaintiff’s retroactive Social Security payment, the funds the plan administrator was targeting did not come from Social Security but instead from overpayments the plan administrator had made to the plaintiff. Thus, the court concluded, ERISA did not bar the plan administrator’s counterclaim. [O’Brien-Shure v. U.S. Laboratories, Inc. Health & Welfare Benefit Plan, 2013 U.S. Dist. Lexis 91692 (N.D. Ill. July 1, 2013).]

Comment: Courts are divided on the issue of whether a plan provision that permits an administrator to take an offset against other income received by a beneficiary creates an equitable lien on that income entitling the plan administrator to reimbursement even where the specific money had been commingled or dissipated. For example, the U.S. Court of Appeals for the Second Circuit, in Thurber v. Aetna Life Ins. Co., 712 F.3d 654 (2d Cir. 2013), ruled that, “If the reason the insurer’s claim is equitable is because it is seeking return of property over which it asserts a lien (the overpayments), whether or not the beneficiary remains in possession of those particular dollars is not relevant as long as she was on notice that the funds under her control belonged to the insurer; she held the money in a constructive trust.”). The Third and Sixth Circuits have reached the same conclusion (Funk v. Cigna Grp. Ins., 648 F.3d 182 (3d Cir. 2011) (Supreme Court’s discussion in Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356 (2006) “strongly implies that . . . the defendant need not possess the property at the time relief is sought in order for the relief to be equitable—any post-agreement possession will suffice”); Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009) (decision to commingle funds did not prevent enforcement of equitable lien by agreement). The Ninth Circuit, however, has come to a different conclusion, requiring that the funds sought be within the possession and control of the beneficiary (Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012).

Court Orders Insurer’s Contestable Investigation Checklist, but Not Its Records Retention Policy, to Be Kept under Seal

As a member of the American Physical Therapy Association, the plaintiff in this case participated in a group disability insurance policy issued by United States Life Insurance Company (US Life). After a claim she filed was denied, she sued US Life and other defendants for breach of contract, breach of the covenant of good faith and fair dealing, and violation of the State of Washington’s Insurance Fair Conduct Act.  The defendants counterclaimed for rescission of the plaintiff’s coverage, alleging that she had made material misrepresentations in her application for coverage.

During the course of the litigation, US Life filed a motion with the court asking that it maintain under seal US Life’s Contestable Investigation Checklist and its Records Retention Policy because it had designated them as “confidential” in pre-trial discovery. It also asked the court to seal deposition testimony by US Life’s agents or employees that mentioned the confidential documents.

US Life asserted that these documents should be maintained under seal because:  (1) “the parties stipulated that documents designated as ‘Confidential’ would be treated as such and filed under seal,”  and (2) “the information at issue is confidential and proprietary and should be protected.”

In its decision on US Life’s motion to seal, the court first ruled that “simply designating a document as ‘confidential'” was not sufficient to justify sealing. It then considered whether the documents should be sealed based on US Life’s assertion that the documents were “proprietary.”

The court explained that there was a general right to inspect and copy public records and documents, including judicial records and documents, and that unless a particular court record was one “traditionally kept secret,” there was a “strong presumption in favor of access” to the record.

To seal the records in this case, the court continued, it had to find “compelling reasons” to do so – and the mere fact that the production of records might lead to a litigant’s embarrassment, incrimination, or exposure to further litigation was not, without more, sufficient to permit a court to seal its records. Compelling reasons, according to the court, existed when court files could become a vehicle for improper purposes, such as the use of records to release trade secrets.

The court then rejected US Life’s argument that it should equate its “proprietary” information with a trade secret, finding “no basis for doing so.”

However, the court pointed out, US Life also had argued that users of its Contestable Investigation Checklist had to “retain it in strict confidence” and that disclosure of the checklist to US Life’s competitors “would harm US Life’s competitive advantage in the insurance industry.”  In particular, the court noted, US Life had argued that “competitors who obtained this checklist would know the amount of time US Life strives to complete various portions of the contestable claim process, and could identify those documents which US Life contends are significant in conducting a contestable review,” and that it would “advise competitors of the various roles certain US Life employees play in the contestable review process and would reveal the levels of review conducted by US Life in determining whether a rescission is appropriate.” 

The court noted that policy and procedure manuals on investigative processes have been found confidential for the same reasons asserted by US Life, and it decided that it would adopt this reasoning and allow the Contestable Investigation Checklist to remain under seal. However, it said, the “compelling reason” analysis with respect to the public’s interest in the judicial process “would change” if this document were again placed at issue during the litigation between the parties. Moreover, the court continued, only the document itself was proprietary information, and the testimony of US Life’s employees about this checklist was “not entitled to protection and shall be unsealed.”

The court was not willing to keep US Life’s Record Retention Policy under seal. It found that US Life had not stated that that document was held in the strictest confidence within the company or that employees were forbidden to make copies or otherwise disseminate the information. Moreover, the court rejected US Life’s contention that “[d]iscovery of this document by competitors would tell them precisely which files are maintained by US Life and for what period of time,” finding that US Life had failed to demonstrate how that discovery could lead to competitive harm.

With respect to this document, the court ruled that US Life’s arguments failed to demonstrate a compelling basis to overcome the public interest in access to judicial records. It said that it was not convinced that US Life’s Record Retention Policy qualified as a source of business information that might harm US Life’s competitive standing, declaring that, “Insurance company documents which simply reflect their routine business practices, common to all such companies, have not been found worthy of being shielded from public view.” Therefore, the court held, neither the Record Retention Policy nor the testimony discussing it would remain under seal. [Karpenski v. American General Life Companies, LLC, 2013 U.S. Dist. Lexis 87102 (W.D. Wash. June 20, 2013).]

Reprinted with permission from the October 2013 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.