Employee Benefit Plan Review – From the Courts

February 22, 2017 | Employment & Labor | Insurance Coverage

Seventh Circuit, Joining Other Circuits, Rejects ERISA Plan’s “Coordination of Benefits” Lawsuit Against Health Insurers

The plaintiff in this lawsuit, filed in a federal district court in Illinois, was the trustee of the Central States, Southeast and Southwest Areas Health and Welfare Fund, a self-funded plan under the Employee Retirement Income Security Act of 1974 (ERISA) that provides health coverage to participating Teamsters and their dependents. The defendants were insurance companies that issued and administered insurance policies for schools and youth sports leagues; their policies covered injuries sustained by young athletes while participating in athletic activities sponsored by these schools and leagues.

The case arose from injuries sustained by student athletes who had medical coverage under both the Central States plan and the independent insurers’ policies. The trustee alleged that the plan had paid the beneficiaries’ medical bills in full, in the total amount of about $343,000, and that the insurers owed reimbursement to the plan.

The plan and the insurers’ policies had competing coordination-of-benefits clauses, and each side claimed that its respective provision made the other primarily liable for the beneficiaries’ medical expenses.

The trustee filed his lawsuit against the insurers under ERISA Section 502(a)(3), seeking “appropriate equitable relief” to enforce the plan’s coordination-of-benefits provision. More specifically, the trustee sought:

  1. A declaratory judgment that the insurers were primarily liable for “current unpaid and future medical expenses” incurred by athletes who were covered by both the plan and one of the insurers;
  2. A declaratory judgment that the insurers were primarily liable for medical expenses for injuries that already had been incurred and treated;
  3. The imposition of an equitable lien on sums held by the insurers in the amount of the benefits that had been paid by the plan; and
  4. An order requiring the insurers to reimburse the plan.

The insurers moved to dismiss all of the trustee’s claims. The district judge granted the motion, and the trustee appealed to the U.S. Court of Appeals for the Seventh Circuit.

The circuit court affirmed, finding that the relief sought by the trustee was not authorized under ERISA Section 502(a)(3).

In its decision, the circuit court explained that whether a remedy was available under Section 502(a)(3) depended on the basis for the plaintiff’s claim and the nature of the underlying remedies sought; both had to be “equitable” for a plaintiff to be able to proceed under Section 502(a)(3). A remedy was equitable, the circuit court continued, only if the plaintiff sought the return of “specifically identified funds that remain in the defendant’s possession or … traceable items that the defendant purchased with the funds (e.g., identifiable property like a car).”

The Seventh Circuit then ruled that the trustee had not met that standard because there were no “specifically identifiable funds” in the insurers’ possession. In fact, the circuit court pointed out, the insurers had “never received any funds at all.”

The circuit court added that no matter what the trustee called his claim, he was “seeking a recovery from the insurers’ general assets.” In other words, the Seventh Circuit stated, the trustee was seeking “money damages, the epitome of legal relief.” That kind of suit, the circuit court ruled, was unavailable under Section 502(a)(3).

The Seventh Circuit concluded by recognizing the “dilemma” its decision created for the plan. It said that ERISA’s broad preemption provision probably barred the plan from bringing a suit under state law, and its ruling prohibited the plan from suing under Section 502(a)(3). The Seventh Circuit said that left ERISA plans with only one way to ensure that they did not pay claims for which other insurers primarily were liable: Refuse to provide coverage to beneficiaries who had other insurance and sue for a declaratory judgment that the other insurer was primarily liable. The circuit court conceded, however, that this approach left an ERISA beneficiary, “through no fault of his own, … considerably worse off for having two policies that coincidentally had conflicting language than he would be if he had only one.” [Central States, Southeast and Southwest Areas Health and Welfare Fund v. American International Group, Inc., 840 F.3d 448 (7th Cir. 2016).]


This Seventh Circuit case was not the first time that Central States had sued insurers of schools and athletic leagues seeking reimbursement for medical expenses it had paid on behalf of its beneficiaries. Other circuit courts that have considered virtually identical claims by the plan all have reached the same conclusion: Central States was not authorized to bring such a lawsuit under ERISA Section 502(a)(3) because the relief it sought was “legal,” and not equitable. See, Central States, Southeast and Southwest Areas Health and Welfare Fund v. Student Assurance Servs., Inc., 797 F.3d 512 (8th Cir. 2015); Central States, Southeast and Southwest Areas Health and Welfare Fund v. Gerber Life Ins. Co., 771 F.3d 150 (2d Cir. 2014); Central States, Southeast and Southwest Areas Health and Welfare Fund v. Bollinger, Inc., 573 F. App’x 197 (3d Cir. 2014); Central States, Southeast and Southwest Areas Health and Welfare Fund v. First Agency, Inc., 756 F.3d 954 (6th Cir. 2014); Central States, Southeast and Southwest Areas Health and Welfare Fund v. Health Special Risk, Inc., 756 F.3d 356 (5th Cir. 2014).

Failure to Attend IME Dooms Plaintiff’s Claim for Long-Term Disability Benefits

The plaintiff in this case, a former employee of ING Investment Management, LLC, was diagnosed with a serious medical condition in 2008. The plaintiff applied for and received long-term disability benefits beginning in January 2009.

The plaintiff’s long-term disability benefits were terminated as of December 2009. The plaintiff did not return to work, and he was fired in June 2010.

The plaintiff then filed a lawsuit against his former employer and various insurance companies alleging, among other things, that his long-term disability benefits had been wrongfully terminated.

The U.S. District Court for the District of Arizona granted summary judgment to the defendants, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit. The circuit court affirmed.

In its decision, the circuit court explained that the claims administrator had told the plaintiff that if he sought disability benefits beyond December 13, 2009, he would be required to attend an independent medical examination (IME) on December 29-30, 2009. The circuit court noted that the plaintiff had refused to attend the IME. As a consequence, it continued, under the terms of the plaintiff’s long-term disability plan, that refusal “was a sufficient basis to terminate his benefits.”

The circuit court was not persuaded by the plaintiff’s argument that his refusal to attend the IME merely was a request to reschedule, finding that he had “made it clear that he would not agree to attend a neuropsychological evaluation.” [Lee v. ING Groep, N.V., 2016 U.S. App. Lexis 19513 (9th Cir. Oct. 28, 2016).]

Company Could Require Driver to Undergo Sleep Apnea Study Based on His BMI, Eighth Circuit Rules

Crete Carrier Corporation hired the plaintiff as an over-the-road truck driver in 2006. As a driver of a commercial motor vehicle for a motor carrier, the plaintiff was bound by regulations issued by the U.S. Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA).

Under the FMCSA regulations, drivers must receive medical examinations from FMCSA-certified examiners every two years. Drivers may not operate commercial motor vehicles unless an examiner certifies them as physically qualified to do so. During this examination – a “DOT physical” – the examiner measures height and weight; takes a health history; tests vision, hearing, blood pressure, and urine; and physically examines numerous body systems. To receive certification, a driver must not have impairments that interfere with driving.

Two FMCSA advisory committees – the Medical Review Board (MRB) and the Motor Carrier Safety Advisory Committee (MCSAC) – have recommended that the FMCSA change its certification standards to reduce the risks from drivers who have obstructive sleep apnea.

In 2008, the MRB found that obstructive sleep apnea causes daytime sleepiness, making drivers more likely to have accidents. It recommended testing some drivers for obstructive sleep apnea.  Then, in February 2012, the MRB and the MCSAC recommended that drivers with body mass indexes (BMIs) over 35 receive only conditional DOT certification and undergo an additional examination for obstructive sleep apnea.

Thereafter, the MRB changed its recommendations. In 2016, it recommended sleep studies for drivers who either have BMIs of 40 or above, or have BMIs of 33 or above plus additional risk factors.

In 2010, Crete began a sleep apnea program based primarily on MRB and MCSAC recommendations. The program required drivers at risk for obstructive sleep apnea to undergo in-lab sleep studies. Drivers found to have obstructive sleep apnea were placed on a treatment regimen.

Crete implemented the program in stages, first at larger terminals and then at smaller facilities. Crete added the plaintiff’s facility in July 2013. That month, Crete told the plaintiff that, due to his size, it was scheduling him for an in-lab sleep study. Crete required an in-lab sleep study if either the driver’s BMI was 35 or above, or the driver’s physician recommended a sleep study. At the plaintiff’s most recent DOT physical, his BMI was over 35.

On July 11, 2013, the plaintiff visited a certified physician assistant not affiliated with Crete. Eleven days later, the certified physician assistant wrote a prescription stating, in whole: “I do not feel it is medically necessary for [the plaintiff] to have a sleep study.”

The next week, the plaintiff refused Crete’s required sleep study. Crete took the plaintiff out of service, and the plaintiff sued Crete. He alleged that Crete had violated the Americans with Disabilities Act (ADA) by requiring the sleep study and had discriminated against him in violation of the ADA because it regarded him as having a disability.

The U.S. District Court for the District of Nebraska granted summary judgment to Crete, and the plaintiff appealed to the U.S. Court of Appeals for the Eighth Circuit.

The circuit court affirmed.

In its decision, the circuit court explained that the ADA prohibits employers from “requir[ing] a medical examination . . . unless such examination . . . is shown to be job-related and consistent with business necessity.” The Eighth Circuit added that when an employer required a medical exam of its employees, the employer had the burden of showing that the exam was job-related, that the asserted “business necessity” was vital to the business, and that the request for a medical examination or inquiry was no broader or more intrusive than necessary.

The circuit court added that the ADA does not require employers to consider each employee’s unique characteristics before requiring a medical exam. To the contrary, it continued, exams of all new employees are permitted under certain circumstances, and the ADA permits employers to require a class of employees to get medical exams.

The Eighth Circuit added that when an employer required a class of employees to submit to a medical exam, it also must show that it had reasons consistent with business necessity for defining the class in the way that it had. An employer satisfied this burden by showing a “reasonable basis for concluding” that the class posed a genuine safety risk and the exam requirement allowed the employer to decrease that risk effectively, the circuit court said. Moreover, it added, a class may include some individuals whom testing revealed did not pose a safety risk, and it may exclude others whom testing revealed did pose a safety risk. All that was required, according to the Eighth Circuit, was that “the employer has defined the class of employees reasonably.”

In this case, the Eighth Circuit found, Crete had established that:

  • Untreated obstructive sleep apnea tended to impair driving skills, increasing the risk of motor vehicle accidents by 1.2-to 4.9-fold;
  • A sleep study was the only way to confirm or rule out an obstructive sleep apnea diagnosis;
  • An in-lab sleep study was the gold standard for diagnosing obstructive sleep apnea;
  • Obesity was the primary anatomic risk factor for obstructive sleep apnea;
  • A BMI of approximately 33 was the optimal cut-off to identify subjects likely to have obstructive sleep apnea;
  • Screening with a BMI above 33 had a sensitivity of 76.9 percent (meaning 76.9 percent of people with obstructive sleep apnea had a BMI above 33) and a specificity of 70.5 percent (meaning 70.5 percent of people who did not have the condition did not have a BMI above 33); and
  • Obstructive sleep apnea could be treated, decreasing the risk of motor vehicle accidents.

The Eighth Circuit noted that the plaintiff had offered “no evidence contrary to these facts,” and it ruled that the sleep study requirement was job-related because it dealt with a condition that impaired drivers’ abilities to operate their vehicles. The circuit court also decided that the sleep study requirement was consistent with business necessity: An examination was necessary to determine whether an individual had obstructive sleep apnea, a condition that posed a public safety hazard by increasing the risk of motor vehicle accidents, the circuit court decided.

The circuit court added that Crete had reasons to suspect that the plaintiff had sleep apnea, given his BMI. It also found that it was reasonable for Crete to define the class as drivers with BMIs of 35 or above because it had a reasonable basis for concluding that that class posed a safety risk given the correlation between high BMIs and obstructive sleep apnea and the sleep study requirement allowed Crete to decrease the risk posed by that class by ensuring that drivers with sleep apnea received treatment.

Accordingly, the circuit court upheld the district court’s decision granting summary judgment in favor of Crete on the plaintiff’s medical-examination claim.

Finally, the Eighth Circuit upheld the district court’s decision in favor of Crete on the plaintiff’s claim that the company had discriminated against him in violation of the ADA, concluding that the “only conceivable reason” that Crete had suspended the plaintiff was that he had not complied with Crete’s lawful sleep-study requirement. [Parker v. Crete Carrier Corp., 839 F.3d 717 (8th Cir. 2016).]

Plaintiff Employed Under False Name Could Bring FLSA Suit, Fifth Circuit Rules

In this case, the plaintiff applied for employment as a general laborer for Permanent Workers, LLC, under the assumed alias “Felix Serrano,” using a fake Social Security card and state-issued identification.  The plaintiff worked for Permanent Workers from approximately November 2011 to December 2012. Permanent Workers provided staff for three shipbuilding facilities managed by Conrad Industries, Inc., and the plaintiff alleged that he had worked at all three shipyards managed by Conrad and that he had worked 50-hour weeks on a frequent basis.

The plaintiff sued Permanent Workers under the federal Fair Labor Standards Act (FLSA). The plaintiff alleged that he had never been paid overtime for his services beyond the 40-hour week. In his sworn declaration, the plaintiff stated:

I was paid $18.00 per hour. For every hour that I worked in excess of forty in any particular work week, I was paid $18.00. On average, I worked approximately fifty hours per week. . . . I know from my conversations with my co-workers that they received approximately $18.00 per hour. . . . I know for a fact that many of these workers did not receive full overtime compensation.

Permanent Workers responded that it had no record of the plaintiff’s employment. It then argued that the plaintiff had failed to establish the requisite “employment relationship” necessary to establish a violation of the FLSA, and it moved for summary judgment.

In response, the plaintiff admitted for the first time that he had been employed under the identity “Felix Serrano.”

The U.S. District Court for the Western District of Louisiana granted summary judgment in favor of Permanent Workers, finding that the plaintiff lacked credibility and that his legal status and identity were unverified.

The plaintiff appealed to the U.S. Court of Appeals for the Fifth Circuit, which ruled that the district court had erred as a matter of law by dismissing the plaintiff’s individual claim.

The Fifth Circuit observed that a district court had the inherent authority to dismiss a plaintiff’s claim with prejudice as a sanction for litigating under a false name. It reasoned, however, that the rationale for such a “severe sanction” was not present in this case, as there was no allegation that the plaintiff had filed his suit under an assumed name or that his misrepresentation otherwise constituted an abuse of the judicial process. [Portillo v. Permanent Workers, L.L.C., 2016 U.S. App. Lexis 19755 (5th Cir. Oct. 31, 2016).]

Local Government May Not Set Higher Minimum Wage Than Provided by State Law, Kentucky Supreme Court Decides

In early 2015, the Louisville/Jefferson County Metro Government enacted its own minimum wage ordinance for all employers within the Louisville Metro boundary, effective July 1 of that year. The wage schedule provided for incremental increases for subsequent years, adjusted in part to reflect the consumer price index. The minimum wage set by the ordinance was higher than the $7.25 minimum wage presented in Kentucky state law.

The Kentucky Restaurant Association, Inc. (KRA), Kentucky Retail Federation, Inc., (KRF), and Packaging Unlimited, LLC (Packaging Unlimited), sued Louisville Metro, seeking to void the ordinance as being outside the authority of Louisville Metro to enact. The plaintiffs also sought an injunction barring the enforcement of the ordinance.

The trial court ruled in favor of Louisville Metro. The case reached the Kentucky Supreme Court, which reversed the trial court’s decision.

The Kentucky Supreme Court explained that the Louisville Metro ordinance required businesses to pay workers a higher wage than the statutory minimum. In other words, it said, what the state statute made legal, the local ordinance made illegal and, thus, prohibited what the statute expressly permitted.

In the Kentucky Supreme Court’s view, this was “precisely” the type of “conflict” that was forbidden by the Kentucky Constitution and law. A local law could not supersede a state law, the court made clear.

The court concluded that there was no additional statutory authority permitting municipalities to raise the minimum wage, and it decided that the Louisville Metro ordinance was invalid and unenforceable. [Kentucky Restaurant Ass’n v. Louisville/Jefferson County Metro Government, 2016 Ky. Lexis 506 (Nov. 10, 2016).]

Nevada Supreme Court Applies Two-Year Statute of Limitations to Suit Under Minimum Wage Amendment to State’s Constitution

The plaintiff in this case worked as a cashier at a convenience and gas station store operated by Terrible Herbst, Inc., in Clark County, Nevada, from May 2007 until March 2012. In July 2014, more than two years after she had last worked for Terrible Herbst, the plaintiff filed a class action lawsuit alleging that Terrible Herbst had failed to pay her and other similarly situated employees the minimum wage required by the 2006 Minimum Wage Amendment (MWA) to the Nevada Constitution.

The MWA guarantees two tiers of minimum wages and permits an employer to pay the lower-tier wage if the employer provides qualifying health benefits. The minimum wage in 2010-2014 for employers providing health benefits to their employees was $7.25 per hour, while employers not providing health benefits had to pay $8.25 per hour.

In her complaint against Terrible Herbst filed in July 2014, the plaintiff asserted that she had been paid less than $8.25 an hour even though Terrible Herbst had failed to provide her with a qualifying health insurance plan.

Terrible Herbst sought judgment in its favor on all claims for damages brought by the plaintiff, arguing that they were more than two years old in July 2014 when the plaintiff had filed suit, and, therefore, that they were barred by the two-year statute of limitations contained in an analogous state statute.

For her part, the plaintiff argued that the trial court should apply a longer four-year limitations period to her claim because the MWA did not contain a specific statute of limitations.

The trial court granted Terrible Herbst’s motion, and the dispute reached the Nevada Supreme Court.

The Nevada Supreme Court affirmed.

In its decision, the court explained that the MWA establishes a base minimum wage, explains how adjustments to the base minimum wage are to be calculated, and specifies that the right to a minimum wage cannot be waived contractually except in a bona fide collective bargaining agreement. The court added that the MWA also establishes the right of employees to sue their employer if the employer does not pay the constitutionally guaranteed wage. However, the court noted, the MWA sets no time frame within which an employee must bring such an action.

The court explained that, when a right of action does not have an express limitations period, it applies the most closely analogous limitations period.

The court then noted that, when the MWA was adopted in 2006, Nevada already had in place a statutory scheme providing for payment of minimum wages. That law, the court observed, imposed a two-year limitations period on statutory back-pay claims.

It then decided that the trial court had properly applied the two-year limitations period. The court explained that the plaintiff sought damages from Terrible Herbst based on her allegation that it had failed to pay the minimum wage required by Nevada law, specifically, the Nevada Constitution. Because the MWA does not expressly indicate which limitations period applies and the most closely analogous statute to the MWA is the state’s minimum wage law, as both permit an employee to sue his or her employer for failure to pay the minimum wage, the court concluded that applying the two-year limitations period applicable to lawsuits seeking the payment of minimum wages was appropriate. [Perry v. Terrible Herbst, Inc., 2016 Nev. Lexis 682 (Oct. 27, 2016).]

New York Federal Court Refuses to Approve FLSA Settlement

Soon after the plaintiff filed a lawsuit under the federal Fair Labor Standards Act (FLSA) in a federal district court in New York, the parties reached a $25,000 settlement. The plaintiff’s counsel submitted the settlement agreement and a proposed stipulation asking the district court to dismiss the plaintiff’s action with prejudice.

The district court refused to do so.

In its decision, the district court explained that, in FLSA cases, parties cannot settle their claims through a private stipulated dismissal with prejudice without the district court’s approval. Before giving that approval, a district court must evaluate whether a proposed FLSA settlement was “fair and reasonable” and whether any proposed award of attorneys’ fees was reasonable, the district court added.

The district court noted that the factors to be considered in determining whether to approve a proposed FLSA settlement included:

  • The plaintiff’s range of possible recovery;
  • The extent to which a settlement would ease the burden of additional litigation;
  • The seriousness of the risks faced by the parties;
  • Whether the settlement was the product of arms-length bargaining; and
  • The possibility of fraud or collusion.

At a minimum, the district court added, it had to have evidence as to the nature of the plaintiff’s claims, the bona fides of the litigation and negotiation process, the employer’s potential exposure both to the plaintiff and to any putative class, the bases of estimates of the plaintiff’s maximum possible recovery, the probability of the plaintiff’s success on the merits, and evidence supporting any requested fee award.

The district court then noted that, in this case, the parties had submitted no “evidence providing a factual basis for the award.” It said that their submission lacked “any explanation as to how they reached a $25,000 settlement,” how that amount was “fair and reasonable,” or to what extent “resolution of the various factual disputes [in this matter] in either side’s favor would alter those figures.”

The district court also found that the “Mutual General Releases” section of the settlement was “far too sweeping.” It said that parties had every right to enter a settlement that waived claims relating to the underlying action in exchange for a settlement payment, but it added that employers could not use FLSA settlements “to erase all liability whatsoever in exchange for partial payment of wages allegedly required by statute.”

The district court next noted that the settlement apportioned 80 percent of the total settlement sum to attorneys’ fees. It ruled that it could not find that the fees in relation to the settlement were fair and reasonable given that the plaintiff’s counsel had not submitted “contemporaneous billing records documenting, for each attorney, the date, the hours expended, and the nature of the work done.”

In any event, the district court ruled, a fee award of 80 percent of the settlement was “beyond the pale.” It explained that, even in the most extraordinary cases, New York federal courts had declined to award fees representing more than one-third of the total settlement amount. This case, the district court said, had required “minimal effort.”

Therefore, the district court declared, it could not conclude that the settlement was fair and reasonable. [Johnson v. Equity Leasing Finance II, Inc., 2016 U.S. Dist. Lexis 138114 (S.D.N.Y. Oct. 4, 2016).]

Reprinted with permission from the February 2017 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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