From the Courts

Sixth Circuit Rules that SPD’s Subrogation Provision Was Enforceable, Even in Absence of a Separate Written Plan

A beneficiary of the health benefits plan established under the Employee Retirement Income Security Act of 1974 (ERISA) by a trust agreement entered into by participating elevator companies and the Board of Trustees of the National Elevator Industry (the Board) was injured in a car accident allegedly caused by a deputy sheriff. The plan paid $34,204.10 in medical expenses on the beneficiary’s behalf. He then filed a negligence action in an Ohio state court against the deputy, the sheriff department, and the local Ohio county where the sheriff department operated, seeking damages for his injuries. He specifically included in detail the expenses that already had been paid by the plan.

As a partial defense to the claims, the state court defendants relied on an Ohio collateral-source statute providing that benefits for an injury or loss received from a third-party source, including an insurance policy, had to be deducted from any award against a political subdivision for that injury.

To protect the subrogation rights set forth in the plan’s summary plan description (SPD) and to establish a lien against any recovery that the beneficiary could receive for his medical expenses, the Board intervened as a plaintiff in the beneficiary’s state court action and filed a motion to strike the collateral-source defense as preempted by ERISA.

Before that issue was resolved and before the case came to trial, the beneficiary settled his claims against the state court defendants for $500,000, without notice to the Board. The settlement agreement provided that the amount paid “represents the settlement of all of [the beneficiary’s] claims but specifically excludes the payments for medical expenses made by National Elevator Industry Heath Benefit Plan on his behalf. . . .”

After the settlement was reached, the Board withdrew its motion to strike, voluntarily dismissed its state court complaint, and made a demand against the proceeds of the settlement for the plan’s expenditures covering the beneficiary’s medical expenses. The beneficiary refused to reimburse the plan and the Board sued him in federal district court, seeking to enforce its subrogation rights by securing a constructive trust and equitable lien over the $34,204.10 that, the board alleged, remained in his possession.  In response, the beneficiary contended that the subrogation provision in the SPD was unenforceable because it appeared only in the SPD and not in the trust agreement.

The district court granted summary judgment in favor of the Board on its subrogation claim, holding that the SPD was the controlling plan document and that the “plain terms of the subrogation provisions” in the SPD established the plan’s right to recoup the medical expenses it had paid on the beneficiary’s behalf. The beneficiary appealed to the U.S. Court of Appeals for the Sixth Circuit.

The circuit court affirmed.

In its decision, the circuit court observed that the Board was authorized to adopt a written welfare benefits plan, to administer the plan, and to act as plan fiduciary. Then, the circuit court pointed out, the Board had not actually drafted a welfare benefits plan but, instead, had created an SPD that explained to employees the benefits plan and how to file a claim for benefits. After the Board approved the SPD, the circuit court said, the SPD constituted the welfare benefits plan as well as the summary of the plan, “in other words, two documents in one.”

The Sixth Circuit next ruled that the SPD, which contained a subrogation provision, was a binding plan document that functioned as the controlling ERISA plan in the absence of a separate plan document, and that the SPD set out enforceable terms.

The circuit court concluded by upholding the Board’s interpretation of the subrogation provision in the SPD and the district court’s decision granting summary judgment in favor of the Board. [Board of Trustees v. Moore, 2015 U.S. App. Lexis 14945 (6th Cir. Aug. 25, 2015).]

Court Finds No Employee Benefits Liability Insurance Coverage for Pension Plan Class Action Lawsuit

Augsburg Fortress Publishers (AFP), a Minnesota nonprofit corporation, and its predecessor maintained a defined benefit pension plan for its employees and retirees until 2010, when the plan was terminated. In April 2010, a class of participants and beneficiaries in the plan filed a lawsuit alleging that AFP and other defendants were liable for underfunding the plan and for failing to disclose information regarding the plan’s funding and the ability to pay projected benefits.

At the time, AFP had general liability insurance coverage through a primary policy with Hartford Fire Insurance Company.  This policy included employee benefits liability (EBL) coverage with limits of $1 million. AFP also had an umbrella policy through Hartford Casualty Insurance Company that provided excess coverage, including excess EBL coverage, with limits of $10 million. The terms and definitions of the EBL coverage in the umbrella policy followed form to those in the primary policy. The EBL coverage provided insurance for “damages” AFP was obligated to pay because of “injury that arises out of any negligent act, error or omission in the ‘administration’ of your ‘employee benefits programs.’”

AFP tendered the complaint in the underlying class action to Great American Insurance Company (GAIC), its fiduciary liability insurer. GAIC acknowledged defense coverage, subject to a reservation of rights. AFP also tendered the complaint to Hartford, seeking defense and indemnity coverage. Hartford issued a letter declining coverage. AFP kept Hartford apprised of developments in the underlying litigation, and Hartford maintained its denial of coverage. The underlying matter eventually settled. AFP contributed $3.2 million to the settlement, with $2.2 million coming from its own funds and $1 million from GAIC.

AFP then sued Hartford, alleging that it had breached its duty to defend and indemnify AFP. AFP and Hartford moved for summary judgment.

The court granted Hartford’s motion.

In its decision, the court pointed out that exclusion d in the Hartford policy barred coverage for the “failure of any investment or saving program to perform as represented by an insured.” This provision, the court continued, excluded coverage based on the allegations in the complaint that AFP had misleadingly conveyed that the pension benefits were secure by, for example, stating that the plan participants “would receive projected benefits upon their retirement.” The court said that these allegations sought liability based on the fact that the plan did not turn out to be as secure as AFP had claimed and had not produced the benefits projected by AFP. According to the court, exclusion d in the Hartford insurance policy “clearly” established that such alleged misrepresentations about how the plan would perform were not covered by the policy.

The court added that exclusion f of the Hartford policy excluded coverage for the failure of AFP to perform any obligation or fulfill any guarantee with respect to the payment of benefits under any “employee benefits program” or the providing, handling, or investing of funds relating to any of these. The court decided that the allegations in the complaint seeking liability for AFP’s failure to disclose information regarding contributions, funding, and the payment of benefits fell within the operative language of exclusion f.

Having found that Hartford had no duty to defend AFP in the underlying matter, the court also found that Hartford did not have a duty to indemnify AFP. [Publishing House of the Evangelical Lutheran Church in America v. Hartford Fire Ins. Co., 2015 U.S. Dist. Lexis 123473 (D. Minn. Sep. 16, 2015).]

Fifth Circuit Rules that Longer Travel Time as Part of 30 Minute Meal Breaks Might Make Them Compensable

Securiguard, Inc., contracted with the U.S. Navy to provide guards for each gate located across the Naval Air Station Meridian base. Securigard hired the plaintiffs to fill those positions. The plaintiff guards usually worked eight-hour shifts with two scheduled 30-minute meal breaks. Each meal break began when a Securiguard “relief officer” arrived at the gate in a company car. The guard then had 30 minutes to spend away from the guard post. During the break, the guards were required to remain armed and in uniform, which included a bulletproof vest.

The plaintiff guards asserted that although they expressed a desire to eat at the gate or while sitting in the parked company car during the break, Securiguard prohibited them from doing so. Securiguard, instead, allegedly required the guards to travel to a designated break area on the base. The time required to reach the closest area varied depending on where the guard was stationed and which shift the guard was working.

At the low end, guards posted at the “truck gate” could walk to a storage unit just a few yards away; guards posted at the “main gate” could drive less than a minute to the base security building; and guards posted at the “flightline gate” between 6:00 a.m. and midnight could go across the street to a fire station.

At the high end, guards posted at the “housing gate” or working the graveyard shift at the flightline gate had an 11 or 12 minute roundtrip drive between the nearest location where they could eat.

The guards alleged that they were required to use the company car to reach the locations not within walking distance, and while in the vehicle they were prohibited from eating, drinking, smoking, or talking on their cell phones.

Treating each 30-minute break as a “bona fide meal period” for which the Fair Labor Standards Act (FLSA) did not require compensation, Securiguard did not compensate the guards for this time.

Department of Labor (DOL) regulations divide workplace breaks into two worlds. They generally exempt “meal periods” from pay requirements but specify that such breaks ordinarily last at least 30 minutes.  “Rest breaks,” or coffee breaks, are periods of short duration, running from five minutes to about 20 minutes, for which an employee must be paid.

More than 30 guards, focusing solely on the 30-minute meal periods, brought suit against Securiguard under the FLSA seeking damages.

The district court granted Securiguard’s motion for summary judgment. It held that the FLSA required compensation for a meal break only when an employer imposed “substantial duties or restrictions” during the designated time. Reasoning that “requiring employees to use company vehicles on lunch breaks can hardly be construed as a work duty” and that the company obtained no benefit from the meal breaks, the district court found that Securiguard’s alleged restrictions were too insubstantial to make the break compensable.

The guards appealed to the U.S. Court of Appeals for the Fifth Circuit.

In its decision, the circuit court explained that the duration of the break was the “key factor” in determining whether something was a shorter, compensable “rest break” or a longer, noncompensable “meal period.” The reason for the temporal distinction, the circuit court said, was that a shorter break was deemed to predominately benefit the employer by giving the company a reenergized employee.

The Fifth Circuit then noted that the “critical question” was whether the meal period was used predominantly or primarily for the benefit of the employer or for the benefit of the employee.  It reasoned that a jury could find that preventing an employee from eating – ostensibly the main purpose of the break – for 12 out of 30 minutes during every break was a meaningful limitation on the employee’s freedom. The Fifth Circuit added that, if a jury were to conclude that the 12 minutes predominately benefited Securiguard, the additional problem for Securiguard was that the remaining portion of the meal period during which the employee could eat was only 18 minutes, which would fall under the time thresholds at which a break usually was deemed a bona fide meal period. At only 18 minutes, the circuit court continued, the break could be viewed as one that, like a morning coffee break, primarily was intended to “promote the efficiency of the [guards]” and thus benefit Securiguard with rejuvenated and nourished employees as opposed to a lengthier period of employee freedom during which the benefit to the employee predominated.

The Fifth Circuit, therefore, affirmed summary judgment in favor of Securiguard on the guards’ claims based on the main gate, the truck gate, and the 6:00 a.m. through midnight shifts at the flightline gate when the mandatory commute time was de minimis. But because a jury could find that the remaining meal breaks did not allow enough time for the employees to use the break for their own purposes to qualify as noncompensable, the circuit court reversed the district court’s grant of summary judgment and remanded for further proceedings. [Naylor v. Securigard, Inc., 2015 U.S. App. Lexis 16421 (5th Cir. Sep. 15, 2015).]

Second Circuit Finds Major League Baseball’s FanFest Exempt from FLSA Requirements

The plaintiff in this case sued Major League Baseball Properties, Inc., and the Office of the Commissioner of Baseball, alleging violations of the minimum wage and recordkeeping provisions of the Fair Labor Standards Act (FLSA). The plaintiff alleged that he had worked without pay as a volunteer for FanFest, a five-day “interactive baseball theme park” organized in conjunction with Major League Baseball’s 2013 All-Star Week in New York City.

Between July 12 and July 16, 2013, FanFest operated in the Jacob K. Javits Center at 655 West 34th Street in New York City. The defendants described FanFest as “the largest interactive baseball theme park in the world.” The venue floor map distributed to patrons proclaimed that FanFest offered “[o]ver 450,000 [s]quare [f]eet to [h]it, [p]itch, [c]atch, [s]hop, [e]at & [l]ive [b]aseball.” Activities at FanFest included baseball-themed video games, photo booths, a simulated baseball dugout and fields, baseball clinics, batting cages, music offerings, and autograph signing. Memorabilia collections, a historical presentation on the Negro Leagues, and the world’s largest baseball also were on display.

The defendants staffed the 2013 All-Star Week events primarily with volunteers – about two thousand in total. The volunteers carried out a range of duties, including greeting customers, answering questions and providing directions, taking tickets, checking credentials, staffing activities, and distributing gifts.

The plaintiff alleged that although these individuals were identified as volunteers, they had expected and had received compensation in the form of free admission to events and in-kind benefits such as t-shirts, caps, drawstring backpacks, fanny packs, water bottles, baseballs, lanyards, free admission to FanFest for each volunteer and a guest, and a chance to win a pair of tickets to the All-Star Game. (Admission to FanFest in 2013 cost $35; the in-kind compensation received by volunteers was worth at least $40.)

The plaintiff worked three shifts, totaling approximately 14 hours, at FanFest between July 12 and July 16, 2013. During his shifts, the plaintiff stamped the wrists of FanFest attendees, handed out bags of baseball paraphernalia, placed paper flyers in bags, directed attendees to the exits, alphabetized liability waivers, and worked at a fielding station instructing attendees to deposit the balls they fielded into buckets. Prior to FanFest, the plaintiff had attended three hours of mandatory information and orientation sessions in June and July 2013, at Citi Field, the site of the All-Star Game, and at the Javits Center. The plaintiff had received no wages for the shift work or training sessions but had been given a t-shirt, cap, drawstring backpack, water bottle, and baseball.

Alleging, among other things, that the defendants had failed to pay the minimum wage as required under the FLSA, the plaintiff filed suit. He moved the district court to certify a collective action on behalf of himself and similarly situated volunteers who had worked without pay at various All-Star Week events since 2010.

The defendants moved to dismiss the plaintiff’s FLSA claims, arguing that FanFest, as a seasonal amusement or recreational establishment, as defined in the FLSA, was exempt from the FLSA’s minimum wage requirements. The U.S. District Court for the Southern District of New York granted the defendants’ motion.

The plaintiff appealed to the U.S. Court of Appeals for the Second Circuit, which affirmed the district court’s decision.

The Second Circuit explained that the FLSA provides that its minimum wage provisions “shall not apply with respect to . . . any employee employed by an establishment which is an amusement or recreational establishment, organized camp, or religious or non-profit educational conference center, if . . . it does not operate for more than seven months in any calendar year.”

The circuit court then ruled that the term “establishment” for purposes of the amusement or recreational establishment exemption to the FLSA means a “distinct, physical place of business.” It decided that FanFest constituted a separate “establishment,” reasoning that FanFest had taken place at the Javits Center and not at any other location or any other All-Star Week event.

Moreover, the circuit court found, FanFest met the seasonality requirement of the FLSA exemption given that it ran only from July 12 to July 16, 2013 and, therefore, did not “operate for more than seven months in any calendar year.”

Finally, the Second Circuit ruled that FanFest, as a gathering of sports enthusiasts for the purposes of entertainment, comprising games, sporting activities, and exhibitions, met the “amusement or recreational nature” requirement in the FLSA exemption. [Chen v. Major League Baseball Properties, Inc., 798 F.3d 72 (2d Cir. 2015).]

Plaintiff’s Failure to Demonstrate Compensation Lost Due to Disability Dooms Claim

In this case, the plaintiff was a trader in the Chicago Board of Trade’s soybean-oil pit until, he said, pain in his neck, back, and arm rendered him unable to use a wearable computer he considered essential to his job. The computer that the plaintiff and other traders used in the soybean-oil pit consisted of a tablet attached to a harness. The harness went around the plaintiff’s neck and the tablet rested at his stomach. This allowed the plaintiff to signal trades freely with both hands.

The plaintiff operated the computer by touching its screen with a stylus. The computer typically would display eight to 12 boxes containing, among other things, oil futures for multiple months, the “spreads” between them, bidding and offering information, the plaintiff’s open positions, and information on filled orders.

The plaintiff also used the computer to execute a variety of order types. On a typical day, a trader looked down at the screen for 80 percent or more of the three-hour-and-45-minute session.

The plaintiff said that his symptoms severely reduced his ability to work on his tablet because he could not look down at the screen.

The plaintiff sought benefits from his disability insurer, Standard Insurance Company, which denied the claim. The plaintiff’s policy provided benefits if, due to a sickness or injury, he was unable to perform the substantial and material duties of his occupation. His duties were “substantial and material” if they accounted for a major portion of his income and he would be deemed unable to perform them only if he could not earn more than 50 percent of his prior earned income.

The plaintiff sued Standard, which moved for summary judgment. The court granted Standard’s motion.

The court explained that the plaintiff had not provided evidence that put into dispute the amount of compensation he allegedly lost by not being able to use his harness-based computer. The court concluded that because the plaintiff had failed to set forth admissible evidence about his compensation or earning capacity in his regular occupation tied to the 50 percent threshold, he had failed to demonstrate a triable issue of fact as to whether he was disabled under the policy. [Dorf v. Standard Ins. Co., 2015 U.S. Dist. Lexis 113334 (N.D. Ill. Aug. 26, 2015).]

ERISA Suit Filed More than Three Years After Plaintiff Had “Actual Knowledge” of Alleged Breach Was Not Timely, Second Circuit Rules

The plaintiff in this case sued Merrill Lynch & Co., Inc., Merrill Lynch, Pierce, Fenner, & Smith, and Bank of America Corp., alleging that they had failed to comply with his instruction to sell all shares of Merrill Lynch stock held in three of his plans, governed by the Employee Retirement Income Security Act of 1974 (ERISA), thereby breaching the fiduciary duty owed to him under ERISA.

The U.S. District Court for the Southern District of New York granted summary judgment in favor of the defendants, and the plaintiff appealed.

The U.S. Court of Appeals for the Second Circuit affirmed. In its decision, the circuit court found that the plaintiff had “actual knowledge” of the purported breach of fiduciary duty in September 2007, but that he had filed his lawsuit more than three years later – in June 2011.

Thus, the circuit court concluded, the plaintiff’s lawsuit was time-barred under the three-year statute of limitations set forth in ERISA Section 413(2). [Ramnaraine v. Merrill Lynch & Co., Inc., 2015 U.S. App. Lexis 14929 (2d Cir. Aug. 25, 2015).]
Circuit Court Enforces Agreement Barring Plaintiff’s Claim in Exchange for Severance Payment

The plaintiff in this case worked for Xerox Corporation until 2002. When his employment ended, he signed an agreement with Xerox relinquishing “any and all claims of any kind, known or unknown” – including claims under the Employee Retirement Income Security Act of 1974 (ERISA) – arising out of “facts which [had] occurred prior to the date of [the] Release.”

As consideration, the plaintiff received a severance payment equal to 26 weeks’ salary (totaling approximately $47,000).

The plaintiff subsequently sued Xerox and the company’s retirement income guarantee plan, claiming that his pension benefit had been incorrectly calculated. The U.S. District Court for the Western District of New York granted summary judgment in favor of the defendants and the plaintiff appealed to the U.S. Court of Appeals for the Second Circuit.

The circuit court affirmed.

In its decision, it explained that releases such as the one signed by the plaintiff were “enforceable.” An individual, the Second Circuit said, could waive his or her right to participate in a pension plan governed by ERISA so long as that waiver was “made knowingly and voluntarily.”

Here, the circuit court found, a booklet given to the plaintiff prior to his signing the release “gave him sufficient notice” about how a certain deduction would be made in calculating his pension benefit. The circuit court also rejected the plaintiff’s contention that the payment he received was inadequate for the release he signed. [Anderson v. Xerox Corp., 2015 U.S. App. Lexis 15048 (2d Cir. Aug. 26, 2015).

Reprinted with permission from the December 2015 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.