Employee Benefit Plan Review – From the Courts

Second Circuit Affirms Decision Rejecting ERISA Claims for Retiree Health Benefits

The U.S. Court of Appeals for the Second Circuit has affirmed a district court’s decision dismissing claims under the Employee Retirement Income Security Act of 1974 (“ERISA”) seeking retiree health benefits.

The Case

The plaintiffs were officers at EmblemHealth, Inc., who retired between 2008 and 2013. Employment agreements promised severance-related benefits, including retiree health benefits “at the same level as that provided an active officer.” Separation agreements provided that the plaintiffs would “be able to commence [r]etiree [h]ealth [b]enefits at the same level as that provided an active officer.”

In 2016, EmblemHealth terminated its group retiree major medical coverage, notwithstanding that current benefits continued for active officers, and announced that, as of 2017, the plaintiffs instead would have the option to purchase individual subsidized insurance coverage.

The plaintiffs sued EmblemHealth, asserting claims under ERISA for denial of benefits and breach of fiduciary duty, as well as state law claims, including breach of contract.

The U.S. District Court for the Southern District of New York dismissed the ERISA claims, finding that the relevant agreements and summary plan descriptions did not create a vested right to retiree benefits on the same terms as active officers and dismissed the state law contractual claims, deeming them preempted by ERISA.

The plaintiffs appealed to the Second Circuit. They argued that the district court had improperly considered certain summary plan descriptions (“SPDs”) and that their employment and separation agreements reasonably could be interpreted to promise vested retiree health benefits. In addition, the plaintiffs argued that the district court erred in ruling that their contractual claims were preempted by ERISA.

The Second Circuit’s Decision

The Second Circuit affirmed the district court’s decision dismissing the plaintiffs’ ERISA claims and vacated that part of the decision that dismissed the plaintiffs’ contractual claims.

In its decision, the Second Circuit explained that the employment and separation agreements provided that eligibility for retiree health benefits was governed by the applicable plan documents. The circuit court noted that the only plan documents in the record were seven SPDs.

It then agreed with the plaintiffs that the district court should not have considered four of the SPDs (the more comprehensive ones) because they were created after the plaintiffs had retired or they applied to non-officers. These SPDs, the circuit court ruled, were “irrelevant” to whether the plaintiffs had been promised vested benefits.

The Second Circuit decided, however, that the district court’s “erroneous reliance on these SPDs” did not require that its decision be vacated because the plaintiffs’ claims to vested benefits were based on language in the employment and separation agreements, not on any applicable plan document, and neither the employment nor separation agreements could reasonably be interpreted as promising vested benefits for life.

The circuit court noted that each employment agreement stated that EmblemHealth “may, in its discretion, at any time and from time to time, change or revoke any of its employee benefit plans, programs or policies and the [employee] shall not be deemed, by virtue of this [a]greement, to have any vested interest in any such plans, programs or policies.” According to the Second Circuit, because the employment agreements “unambiguously” reserved to EmblemHealth the right to amend or terminate its retiree health plan, the employment agreements could “not reasonably be interpreted as promising to vest retiree health benefits.”

The Second Circuit then ruled that the separation agreements – which stated only that the plaintiffs would “be able to commence [r]etiree [health [b]enefits . . .” – could not reasonably be interpreted as promising vested retiree benefits. The circuit court pointed out that the separation agreements made no promise as to the specific type of retiree health coverage that the plaintiffs would receive or the duration of coverage. The circuit court noted that the separation agreements also stated that eligibility for retiree health benefits was subject to the terms and conditions of each applicable health benefit plan “as may exist or change” for similarly situated employees of EmblemHealth “from time to time.”

The Second Circuit then ruled that because the plaintiffs had identified no language in the employment agreements, separation agreements, or applicable SPDs that reasonably was capable of being interpreted as promising vested benefits, they failed to state an ERISA claim for denial of benefits. It concluded that the plaintiffs’ breach of fiduciary duty claim failed because it also depended on their denial of benefits claim.

The Second Circuit also ruled that the contractual claims were not preempted because “they derive from an independent legal duty – a contractual right to parity with EmblemHealth’s active officers – as opposed to a particular benefit plan.” [Abernethy v. EmblemHealth, Inc., No. 19-422 (2d Cir. Oct. 21, 2019).]

Sixth Circuit Court Rejects Plaintiff’s Claim That She Was Discharged in Violation of ERISA

The U.S. Court of Appeals for the Sixth Circuit has affirmed a district court’s decision dismissing a plaintiff’s claim that she was discharged in violation of Section 510 of ERISA, finding that the plaintiff failed to plausibly allege that her employer had terminated her employment for the purpose of interfering with her rights as a beneficiary of her deceased husband’s benefits.

The Case 

The plaintiff alleged that she and her husband were both full-time employees of East Kentucky Power Cooperative (“EKPC”) until her husband’s death on October 11, 2014. After a brief period of bereavement, the plaintiff said, she returned to work at EKPC. She alleged generally that she sought information about spousal death benefits and that she was subjected to unspecified verbal harassment in two meetings, the second of which culminated in her alleged discharge. Specifically, the plaintiff alleged:

•  “While attempting to navigate EKPC’s complicated spousal death benefit options, [the plaintiff] sought the advice of an EKPC [h]uman [r]esources employee and EKPC’s [g]eneral [c]ounsel (the ‘General Counsel’).”
• “[O]n or about December 8, 2014, during a meeting in the General Counsel’s office, [the plaintiff] was verbally assailed, harassed and physically threatened by an EKPC employee (‘the incident’).”
• “Shortly after the incident, [the plaintiff] began to experience severe chest pains and was later transported to the hospital . . . [and was] advised to take a leave of absence from EKPC.”
• “Upon her return to EKPC [on or about January 29, 2015], [the plaintiff] was unable to acquire information from EKPC representatives regarding the supplemental death benefits arising from [her husband’s] passing, and therefore directly contacted a National Rural Electric Cooperative Association (‘NRECA’) representative, the organization responsible for administering EKPC’s employee retirement plans, for assistance in answering her questions.”
• “On or about May 15, 2015, following her attempted contact with the NRECA representative, [the plaintiff] met with an EKPC [h]uman [r]esources employee [who] was presumably disturbed by [the plaintiff’s] decision to seek guidance directly from NRECA (the ‘meeting’).”
• “Upon information and belief, during the meeting the EKPC employee verbally assailed and harassed [the plaintiff] and specifically directed her to grab her purse and go home (the ‘termination’).”
• “Following her termination, [the plaintiff] immediately left the EKPC premises and sent an email to her immediate supervisor advising him she would not return to EKPC.”

Based on these allegations, the plaintiff sued EKPC, alleging that it had violated Section 510 of ERISA, which makes it unlawful to “discharge, fine, suspend, expel, discipline or discriminate against a participant or beneficiary . . . for the purpose of interfering with the attainment of any right to which [he or she] may become entitled under [an employee benefit] plan.” According to the plaintiff, her employment had been terminated “not for exercising her own right, but for attempting to attain important information regarding [her deceased husband’s ERISA] benefits.”

The U.S. District Court for the Eastern District of Kentucky dismissed this claim, ruling that the plaintiff had not pleaded facts that plausibly alleged that EKPC had engaged in prohibited conduct “with the specific intent to violate ERISA.”

The plaintiff appealed to the Sixth Circuit. Among other things, the plaintiff argued that an inference of improper motivation could be drawn solely based on “temporal proximity” – namely, that she was discharged (actually or constructively) during a meeting about spousal benefits shortly after having contacted the NRECA about those benefits

The Sixth Circuit’s Decision

The Sixth Circuit affirmed.

In its decision, the circuit court explained that temporal proximity between an employer’s actions and the date when the employee would have become eligible for benefits could, in some cases, “support an inference that the adverse actions were taken with the intent of interfering with future [ERISA] benefits.”

Here, the circuit court said, there were “no facts from which to infer” why the plaintiff was sent home. It noted that there was “no claim that her discharge prevented her from receiving spousal death benefits to which she otherwise would have become entitled” and that she did not allege that her rights to spousal death benefits depended on her own employment.

According to the circuit court, the allegation that the plaintiff was discharged during a meeting about her husband’s benefits shortly after having attempted to contact the NRECA about those benefits did “not give rise to an inference” that her employment was terminated with the intent to interfere with her rights as a beneficiary of her deceased husband’s benefits.

Therefore, the circuit court concluded, the district court had not erred in dismissing this claim. [Spangler v. East Kentucky Power Cooperative, Inc., No. 19-5034 (6th Cir. Oct. 28, 2019).]

Sixth Circuit Affirms Decision Denying Attorneys’ Fees in QDROs Case

The U.S. Court of Appeals for the Sixth Circuit has affirmed a district court’s decision denying attorneys’ fees to the victorious party in an enforcement case under the Employee Retirement Income Security Act of 1974 (“ERISA”) involving a challenge to the enforceability of qualified domestic relations orders (“QDROs”).

The Case

When a couple married for 55 years were divorced, the family court issued two QDROs requiring the husband to sign off on the division of certain retirement funds. He ignored the orders and the family court found him in contempt. The family court encouraged the wife, who suffered from worsening dementia, to enforce the QDROs in a federal action under ERISA.

The wife’s attorney, who had been appointed her guardian, filed an action in federal court to enforce the QDROs. The husband answered that the QDROs were void and unenforceable on various grounds.

The U.S. District Court for the Northern District of Ohio entered an injunction enforcing the QDROs.
The guardian then moved for an award of attorneys’ fees against the husband and his lawyer.

The district court denied the motion for attorneys’ fees. The district court was unconvinced that the husband and his lawyer had litigated in bad faith or that their positions, even if unsuccessful, were objectively unreasonable. It observed that the husband had consistently asserted “that the underlying [s]tate [c]ourt proceedings were rife with error” and that he had ignored the QDROs for that reason.

The guardian appealed to the Sixth Circuit. He argued that the district court should have awarded attorneys’ fees because the husband had disobeyed the QDROs and had been held in contempt, and because the guardian had to file a federal enforcement action to get the QDROs enforced.

The Sixth Circuit’s Decision

The Sixth Circuit affirmed.

In its decision, the circuit court found that the district court had properly considered the five factors it had previously explained were relevant to ERISA fee-shifting motions:

(1) The opposing party’s culpability or bad faith;
(2) The party’s ability to satisfy an award;
(3) The general deterrent value of an award;
(4) Whether the party seeking fees was pursuing a “common benefit” for a plan’s beneficiaries or aiming to “resolve significant legal questions”; and
(5) The merits of the parties’ positions.
The Sixth Circuit pointed out that the district court found no dispute about whether the husband could satisfy a fee award (he could) or whether the guardian was seeking a common benefit for a group of beneficiaries (he was not).

The Sixth Circuit added that the district court considered, and rejected, the guardian’s argument that a fee award “would deter others from disobeying court orders.”

The circuit court then focused on the remaining two factors: the first (the husband’s culpability) and the fifth (the merits of the parties’ positions). The circuit court noted that the district court sided with the guardian on the merits. It said, however, that the district court “rightly declined to award fees for that reason alone.”

The circuit court pointed out that two conclusions had tipped the district court’s judgment against fee-shifting. First, the district court did not think that the husband had litigated in bad faith. Second, the district court did not think that his positions were completely unreasonable.

The Sixth Circuit ruled that neither conclusion was an abuse of discretion.

The circuit court conceded that the husband had attacked the family court’s jurisdiction, defied the QDROs, and “fought to the bitter end.” However, it said, the guardian had not demonstrated that the husband’s legal positions were “frivolous” – even his defiance of the QDROs.

The circuit court observed that “whenever you defy a facially valid court order, you have some explaining to do.” It reasoned that the husband’s contention that the QDROs were void “was a reasonable defense to this ERISA enforcement suit.”

The Sixth Circuit concluded that because the district court had made a reasonable judgment call about whether attorneys’ fees were appropriate, it had not abused its discretion in choosing not to sanction the husband. [Simonoff v. Saghafi, No. 19-3001 (6th Cir. Sep. 26, 2019).]

Ninth Circuit Affirms Decision Denying Plaintiff’s Claim for Disability Benefits

The U.S. Court of Appeals for the Ninth Circuit has affirmed a district court’s decision rejecting a plaintiff’s lawsuit seeking to recover disability benefits.

The Case

The plaintiff, who was the head of human resources at Dreamworks, submitted a claim for disability benefits under Dreamworks’ employee welfare benefit plan, which was governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).

The plan administrator denied the plaintiff’s claim, and she sued.

The U.S. District Court for the Central District of California conducted a bench trial and denied the plaintiff’s claim for benefits.

The plaintiff appealed to the Ninth Circuit.

The Ninth Circuit’s Decision

The Ninth Circuit affirmed.

In its decision, the circuit court explained that, to prevail on her claim, the plaintiff needed to prove that she was “unable to perform with reasonable continuity the substantial and material acts necessary to pursue [her] usual occupation in the usual and customary way” during the coverage period.

The circuit court then decided that the district court had not clearly erred in finding that the plaintiff was able to perform her job normally until she was terminated for non-medical reasons.

The circuit court pointed out that the plaintiff’s employer presented evidence that she did not significantly change her hours, job duties, or performance during the period of claimed disability; that treatment records from the plaintiff’s doctor showed that her fibromyalgia condition was improving during that period; and that her doctor first opined that she was disabled months after the coverage period had ended.

The Ninth Circuit rejected the plaintiff’s objections to the district court’s evaluation of the evidence. The circuit court explained that although the district court was not required to defer to the opinions of the plaintiff’s doctor, it nevertheless accorded them the “greatest weight” and did not rely heavily on the opinions offered by the plan administrator’s doctors.

Moreover, the circuit court added, an independent medical examination was not required, particularly when the plaintiff “proffered insufficient evidence to establish disability.”

The Ninth Circuit also found that the record did not support the plaintiff’s contention that, to deny coverage, the plan administrator had belatedly raised the circumstances of her termination and whether she had reduced her work schedule.

Next, the circuit court ruled that the district court had reasonably determined that the plaintiff failed to show that she could not satisfy the cognitive functions of her job. It also noted that the district court had addressed the plaintiff’s ability to work the required hours, finding that she had not reduced her work schedule.

Finally, the Ninth Circuit concluded, the district court had duly considered the plaintiff’s subjective complaints and had reasonably concluded that they did not establish the requisite level of disability. [Demko v. Unum Life Ins. Co. of America, No. 18-55428 (9th Cir. Oct. 18, 2019).]

ERISA Preempts Plaintiff’s Claims Against Plan Administrator, District Court Rules

A federal district court in Kentucky has ruled that all claims asserted against the administrator of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) were preempted by ERISA.

The Case

In May 2016, while employed by Diversicare Healthcare Services, Inc., the plaintiff suffered a stroke and was unable to work. The administrator of Diversicare’s employee welfare benefit plan, which was governed by ERISA, awarded long-term disability (“LTD”) benefits to the plaintiff under the plan from November 6, 2016 to June 6, 2017.

The plan administrator originally denied the plaintiff’s requests for benefits beyond June 2017. Following the plaintiff’s appeal and submission of additional records, the plan administrator paid benefits to the plaintiff for the period June 6, 2017 to December 31, 2017.

While another appeal by the plaintiff was pending, the plaintiff filed suit against the plan administrator, alleging negligence, negligent infliction of emotional distress, outrage, fraudulent misrepresentation, and violations of Kentucky’s Consumer Protection Act.

The plan administrator issued a favorable determination on the plaintiff’s appeal on April 22, 2019.
About two weeks later, the plaintiff amended her complaint to include allegations of bad faith and violations of Kentucky’s Unfair Claims Settlement Practices Act.

The plan administrator moved to dismiss or, in the alternative, for summary judgment, arguing that the plaintiffs’ claims were pre-empted by ERISA.

The District Court’s Decision

The district court granted the plan administrator’s motion.

In its decision, the district court explained that a “key inquiry” in determining if a plaintiff’s cause of action was preempted by ERISA was whether the cause of action was based on the terms of the “ERISA-regulated employee benefit plan” itself, as opposed to an independent legal duty.

The district court added that, when the decision to award benefits under an ERISA benefit plan was a necessary element of a plaintiff’s state law cause of action, that cause of action did not present a legal duty independent of those imposed by ERISA and, therefore, it was completely preempted by ERISA.

Here, the district court observed, the plaintiff alleged a “panoply of state law claims” – negligence, negligent infliction of emotional distress, outrage, fraudulent misrepresentation, bad faith, and violations of Kentucky’s Consumer Protection Act and Unfair Claims Settlement Practices Act. The district court then found that all of them were preempted by ERISA.

The district court pointed out that the U.S. Supreme Court, in Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987), held that common law claims for breach of contract, fraud, bad faith, and breach of fiduciary duties based on alleged improper processing of claims under an ERISA plan were preempted.

The district court, citing Smith v. Provident Bank, 170 F.3d 609 (6th Cir. 1999), Schachner v. Blue Cross and Blue Shield of Ohio, 77 F.3d 889 (6th Cir. 1996), and Tolton v. American Biodyne, Inc., 48 F.3d 937 (6th Cir. 1995), also noted that state law claims including breach of contract, insurance bad faith, misrepresentation, conversion, negligence, violations of the Consumer Protection Act, and retaliation were preempted by ERISA.

The district court added that the plaintiff’s Kentucky Unfair Claims Settlement Practices Act and Kentucky Consumer Protection Act claims also were preempted, referencing Howard v. Prudential Ins. Co. of America, 248 F. Supp. 3d 862 (W.D. Ky. 2017), Hanshaw v. Life Insurance Co. of North America, 2014 U.S. Dist. LEXIS 151411 (W.D. Ky. Oct. 24, 2014), and Curry v. Cincinnati Equitable Ins. Co., 834 S.W.2d 701 (Ky. Ct. App. 1992).

Next, the district court, citing Tassinare v. American National Insurance Co., 32 F.3d 220 (6th Cir. 1994), ruled that the plaintiff’s infliction of emotional distress and outrage claims were preempted by ERISA.

The district court was not persuaded by the plaintiff’s contention that her claims were beyond ERISA’s purview because she asserted violations of duties that were not related to ERISA or the plan under which she received benefits. The district court found that each of the plaintiff’s claims was based on the plan administrator’s allegedly wrongful denial of benefits and that none of the plaintiff’s claims alleged wrongdoing independent of the plan administrator’s handling of her claim.

Finally, the district court pointed out that the plaintiff did not allege any relationship between the plan administrator and the plaintiff other than through the policy.

Accordingly, the district court concluded that this was “an ERISA case” and the plaintiff’s claims fell “squarely within the scope of” the ERISA pre-emption provision.

The case is Lowe v. Lincoln National Life Ins. Co., No. 19-31-HRW (E.D. Ky. Oct. 3, 2019).