Employee Benefit Plan Review – From the Courts

September 7, 2018 | Ian S. Linker | Employment & Labor | Insurance Coverage

ERISA Does Not Permit Plaintiffs to Rely on Same Allegations to Seek Both Equitable Relief and Benefits

The Employee Retirement Income Security Act of 1974 (ERISA) permits a plaintiff to seek equitable relief and to seek benefits. But can a plaintiff assert separate claims for equitable relief and benefits based on the same allegations? A federal district court in Alabama has issued a decision explaining why that is not permissible.

The Case

After the plaintiff in this case, an attorney, was diagnosed with Parkinson’s disease, she claimed that she was “totally disabled” within the meaning of her law firm’s ERISA-governed welfare benefit plan.

The plaintiff applied for long-term disability benefits and a waiver of life insurance premiums. The plan administrator denied her application for long-term disability benefits. The administrator initially denied her application to waive life insurance premiums, later determined that she was eligible for that benefit, and finally terminated her waiver.

The plaintiff sued the administrator, asserting three causes of action under ERISA:

  • recovery of benefits, pursuant to 29 U.S.C. § 1132(a)(1)(B) (Count One);
  • breach of fiduciary duty, pursuant to 29 U.S.C. § 1132(a)(3) (Count Two); and
  • reinstatement of her waiver of premiums, pursuant to 29 U.S.C. § 1132(a)(1)(B) (Count Three).

The plan administrator moved to dismiss Count Two. It contended that Count Two was a claim for “equitable relief” that the plaintiff could not sustain when she also sought recovery of benefits under 29 U.S.C. § 1132(a)(1)(B) based on the same factual allegations.

The District Court’s Decision

The court granted the plan administrator’s motion to dismiss Count Two of the plaintiff’s complaint.

In its decision, the court explained that, under 29 U.S.C. § 1132(a)(1)(B), a participant or beneficiary of a plan governed by ERISA may bring a civil action to recover benefits due to the participant or beneficiary under the terms of the plan, to enforce the participant or beneficiary’s rights under the terms of the plan, or to clarify the participant or beneficiary’s rights to future benefits under the terms of the plan.

The court added that, under 29 U.S.C. § 1132(a)(3), a participant, beneficiary, or fiduciary may bring a civil action “to obtain other appropriate equitable relief (i) to redress [violations of any provision of this subchapter or the terms of the plan], or (ii) to enforce any provisions of this subchapter or the terms of the plan.”

The court pointed out that 29 U.S.C. § 1132(a)(3) is a “catchall” provision that offers “appropriate equitable relief” for injuries caused by violations that 29 U.S.C. § 1132 does not elsewhere adequately remedy.

According to the court, if claims are based on different factual allegations, a plaintiff may raise both a 29 U.S.C. § 1132(a)(1)(B) claim for recovery of benefits and a 29 U.S.C. § 1132(a)(3) claim for equitable relief, as long as no other section of ERISA provides an adequate remedy for the facts supporting the 29 U.S.C. § 1132(a)(3) claim.

A plaintiff, however, may not raise both a 29 U.S.C. § 1132(a)(1)(B) claim and a 29 U.S.C. § 1132(a)(3) claim based on the same factual allegations, even as alternatives to each other, according to the court.

In this case, the court found, the plaintiff’s complaint raised two 29 U.S.C. § 1132(a)(1)(B) claims: Count One, seeking recovery of the long term disability benefits and the waiver of life insurance premium benefits; and Count Three, seeking reinstatement of her waiver of premium benefits. Both of those claims related to the plan administrator’s purportedly erroneous denial of those benefits.

The court added that the plaintiff’s complaint raised one 29 U.S.C. § 1132(a)(3) claim: Count Two, seeking monetary damages for breach of fiduciary duty. The court observed that Count Two related to the plan administrator’s purportedly improper termination of the plaintiff’s waiver of life insurance premiums after having approved that benefit.

The court then agreed with the plan administrator that 29 U.S.C. § 1132(a)(1)(B) provided “an adequate remedy” for the violations alleged in Count Two. The factual allegations underlying all three counts were the same: the plaintiff contended that the plan administrator had used improper claims handling processes, resulting in the erroneous denial and termination of benefits to which she was entitled. According to the court, 29 U.S.C. § 1132(a)(1)(B) provided an adequate remedy for all of those allegations by permitting the plaintiff “to recover benefits due to [her] under the terms of his plan, to enforce [her] rights under the terms of the plan, or to clarify [her] rights to future benefits under the terms of the plan.”

The court was not persuaded by the plaintiff’s assertion that Counts One and Three were based on different factual allegations than Count Two because Counts One and Three stemmed from the plan administrator’s erroneous interpretation of the plan and the policies, while Count Two stemmed from its manner of processing claims. In the court’s opinion, at their essence, all of the plaintiff’s claims stemmed from the same factual allegations: that she qualified for benefits that the plan administrator had wrongfully denied. 

Whether the wrongful denial was based on an erroneous interpretation of the plan administrator’s policies or improper claims handling made “no difference” in determining whether 29 U.S.C. § 1132(a)(1)(B) provided an adequate remedy for those denials, the court decided.

Moreover, the court rejected the plaintiff’s argument that, because she sought different forms of relief under each count (recovery of benefits in Count One, monetary damages in Count Two, and reinstatement of a waiver of premiums in Count Three), 29 U.S.C. § 1132(a)(1)(B) failed to provide an adequate remedy for Count Two. For ERISA purposes, the court said, “relief” corresponded to “remedy.”

Finally, the court also rejected the plaintiff’s argument that, under the U.S. Supreme Court’s decision in CIGNA Corporation v. Amara, 563 U.S. 421, 431-32 (2011), a plaintiff could bring a 29 U.S.C. § 1132(a)(3) claim based on the same facts if the injuries alleged and remedies sought were different.

According to the court, Amara did not authorize a plaintiff to seek equitable relief and recovery of benefits based on the same factual allegations. Rather, the court explained, in Amara, the Supreme Court remanded the case for consideration of whether equitable relief under 29 U.S.C. § 1132(a)(3) was appropriate because it found that the plaintiffs lacked a remedy under 29 U.S.C. § 1132(a)(1)(B).

The court concluded that because all of the plaintiff’s factual allegations supported claims under 29 U.S.C. § 1132(a)(1)(B), she could not bring a claim under 29 U.S.C. § 1132(a)(3), and it granted the plan administrator’s motion to dismiss Count Two. [Stewart v. Hartford Life & Accident Ins. Co., No. 2:17-cv-01423-KOB (N.D. Ala. May 30, 2018).]

Employee Equity Growth Plan Was Not a Defined Contribution Plan Subject to ERISA, Ninth Circuit Rules

Whether a defined contribution plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA) depends on the plan’s primary purpose. As the U.S. Court of Appeals for the Ninth Circuit explained in Rich v. Shrader, 823 F.3d 1205, 1210 (9th Cir. 2016), the “paramount consideration” in determining whether a compensation plan qualifies as an employee pension benefit plan under ERISA is if its primary purpose is to provide deferred compensation or retirement income. The Ninth Circuit recently applied that test to affirm a decision by the U.S. District Court for the District of Oregon that a company’s employee equity growth (EGP) plan was not subject to ERISA.

The Case

The circuit court explained that the “primary purpose” of the company EGP at issue was not to provide retirement benefits or deferred income but, rather, to encourage longevity and provide increased compensation to select company employees.

The circuit court noted that, although the EGP provided participants with shares that vested over 20 years, participants were allowed to “retire” their shares prior to completing 20 years of service and prior to retirement. Given the option to retire shares early under the EGP, the circuit court reasoned, there was no “systematic deferral” of redemption until retirement or termination.

Moreover, the circuit court pointed out that the selection of employees to participate in the EGP was at the sole discretion of the company’s board of directors, which further demonstrated that the primary purpose of the EGP was “not to provide retirement or deferred income.”

The circuit court concluded that, even considering all the surrounding circumstances, a “reasonable person” could not find that the EGP passed the primary purpose test. [Miller v. Olsen, No. 16-35717 (9th Cir. May 31, 2018).]

Mental Health Parity Act Precluded Different Treatment for Mental Health Patients, Ninth Circuit Concludes

The U.S. Court of Appeals for the Ninth Circuit, reversing a district court’s decision, has ruled that the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the Parity Act) precluded a plan subject to the Employee Retirement Income Security Act of 1974 (ERISA) from deciding that it would provide room and board reimbursement at licensed skilled nursing facilities for medical and surgical patients but would not provide room and board reimbursement at residential treatment facilities for mental health patients.

The Case

A self-funded group health benefit plan covering the sponsor’s employees and their dependents provided coverage for mental health services including services related to “the diagnosis and/or treatment of an Illness Affecting Mental Health.” The plan covered “[b]ed, board, and general nursing care” as well as “[a]ncillary services” provided at skilled nursing facilities. It also provided coverage at residential treatment facilities, defined as duly licensed facilities dealing with illnesses affecting mental health.

Nicole B. was covered by the plan and was admitted to a residential treatment program for the period July 6, 2011 to June 8, 2012. The plaintiff sought to have the plan cover the cost of Nicole B.’s treatment there, including room and board costs. The plan denied room and board coverage and, after exhausting the plan’s administrative remedies, the plaintiff brought an action under ERISA.

The U.S. District Court for the Western District of Washington granted summary judgment in favor of the plan, and the plaintiff appealed to the Ninth Circuit. The plaintiff asserted that the district court had erred when it decided that the Parity Act did not require that the plan’s coverage for stays at licensed inpatient residential treatment facilities had to be no more restrictive than stays at skilled nursing facilities.

The Ninth Circuit’s Decision

The circuit court reversed.

In its decision, the circuit court explained that the Parity Act requires that benefits in a plan that provides for “both [(a)] medical and surgical benefits and [(b)] mental health or substance use disorder benefits” must not impose more restrictions on the latter than it imposes on the former. In other words, the Ninth Circuit said, the Parity Act directs that benefits and treatment limitations for mental health problems shall be “no more restrictive” than those for medical and surgical problems.

Thus, the circuit court found, the Parity Act precluded the plan from deciding that it would provide room and board reimbursement at licensed skilled nursing facilities for medical and surgical patients but would not provide room and board reimbursement at residential treatment facilities for mental health patients.

The circuit court added that regulations issued under the Parity Act by the Departments of Labor, Health and Human Services, and Treasury also “strongly suggested” that a plan could not allow room and board costs at a skilled nursing facility for a person who was an inpatient while denying them at a residential treatment facility for a person who was an inpatient.

Accordingly, the Ninth Circuit concluded, the plan should not have denied Nicole B. coverage on the basis that her stay was at a residential treatment facility and the district court had incorrectly concluded that the plan was not required to provide room and board coverage for stays at residential treatment facilities even though it provided room and board at skilled nursing facilities. [Danny P. v. Catholic Health Initiatives, No. 16-35609 (9th Cir. June 6, 2018).]

ERISA Preempts Arkansas Law Governing PBMs, Eighth Circuit Holds

The U.S. Court of Appeals for the Eighth Circuit has ruled that the Employee Retirement Income Security Act of 1974 (ERISA) preempted an Arkansas law governing the conduct of pharmacy benefits managers (PBMs).

The Case

In 2015, the Arkansas General Assembly passed a state law to govern the conduct of PBMs. The law mandated that pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug based on the invoice from the wholesaler. It did this by defining “pharmacy acquisition cost” as the amount charged by the wholesaler as evidenced by the invoice.

The law further imposed requirements on PBMs in their use of so-called “maximum allowable cost” (MAC) lists by making them update the lists within at least seven days from the time there was a certain increase in acquisition costs. Additionally, the law also contained administrative appeal procedures and allowed pharmacies to reverse and rebill each claim affected by the pharmacies’ inability to procure the drug at a cost that was equal to or less than the cost on the relevant MAC list where the drug was not available “below the pharmacy acquisition cost from the pharmaceutical wholesaler from whom the pharmacy or pharmacist purchases the majority of prescription drugs for resale.” Finally, the law contained a “decline-to-dispense” option for pharmacies that would lose money on a transaction.

The Pharmaceutical Care Management Association (PCMA) filed a lawsuit claiming that ERISA preempted the Arkansas law.

The U.S. District Court for the Eastern District of Arkansas agreed that ERISA preempted the law, and the state appealed to the Eighth Circuit.

The Eighth Circuit’s Decision

The circuit court agreed that ERISA preempted the state law.

In its decision, the circuit court explained that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plans.” 29 U.S.C. § 1144(a). A state law “relates to” an ERISA plan if it has “a connection with or a reference to such a plan,” the circuit court added.

The Eighth Circuit pointed out that in Pharmaceutical Care Management Ass’n v. Gerhart, 852 F.3d 722 (8th Cir. 2017), it held that an Iowa statute, similar in purpose and effect to the Arkansas law, was preempted by ERISA because it had a prohibited “reference to” ERISA, and because it interfered with national uniform plan administration. The Eighth Circuit then said that Gerhart controlled whether ERISA preempted the Arkansas law.

The circuit court explained that the Iowa statute in Gerhart required PBMs to provide information regarding their pricing methodologies to Iowa’s insurance commissioner at the commissioner’s request. The Iowa statute also limited the types of drugs to which a PBM could apply MAC pricing and limited the sources from which a PBM obtained pricing information. Finally, the Iowa statute required PBMs to provide information regarding their pricing methodologies in their contracts with pharmacies and to provide procedures by which pharmacies could comment on and appeal MAC price lists or rates, with potential retroactive payment to pharmacies for incorrect pricing. In Gerhart, the Eighth Circuit held that the Iowa statute both explicitly and implicitly referred to ERISA by regulating the conduct of PBMs administering or managing pharmacy benefits, and also had a connection with ERISA. Therefore, it was preempted.

The Eighth Circuit disagreed with Arkansas’ argument that Gerhart should be limited to its consideration of the Iowa Act’s “express reference” to ERISA, and that Gerhart’s “implicit reference” analysis was dicta. The circuit court explained that, in addition to finding that the Iowa law had a prohibited express reference to ERISA, it also found that the Iowa law made “implicit reference” to ERISA through regulation of PBMs who administered benefits for “covered entities,” which, by definition, included health benefit plans and employers, labor unions, or other groups that provided health coverage. These entities, the circuit court said, were “necessarily subject to ERISA regulation.”

The circuit court acknowledged that there is generally a presumption against preemption, but concluded that because the Arkansas law both related to and had a connection with employee benefit plans, the presumption was gone and the law was preempted. [Pharmaceutical Care Management Ass’n v. Rutledge, Nos. 17-1609, 17-1629 (8th Cir. June 8, 2018).]

Ninth Circuit Affirms Decision Overturning Denial of “Own Occupation” Long-Term Disability Benefits and Attorneys’ Fees

After the U.S. District Court for the Northern District of California overturned a denial of so-called “own occupation” long-term disability benefits under a welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), and awarded $245,305.50 of attorneys’ fees to the plaintiff, the defendants appealed to the U.S. Court of Appeals for the Ninth Circuit.

They argued that the district court had improperly considered evidence outside the administrative record – in particular, a decision granting the plaintiff Social Security benefits – and had erred when it decided that the plaintiff qualified for “own occupation” benefits. They also challenged the way the district court had calculated the attorneys’ fees payable to the plaintiff.

The Ninth Circuit’s Decision

The circuit court affirmed the award of “own occupation” benefits but vacated the award of attorneys’ fees.

In its decision, the circuit court explained that where, as in this case, a district court reviewed de novo the denial of benefits, that review was limited to the administrative record unless circumstances clearly established that additional evidence was necessary to conduct an adequate de novo review of the benefit decision.

The Ninth Circuit then found that several such circumstances were present in this case, including:

  • complex medical questions;
  • issues regarding the credibility of medical experts; and
  • the fact that additional evidence (that is, the Social Security decision) could not have been presented in the administrative process.

The circuit court added that it has recognized that Social Security decisions “can be particularly important evidence in ERISA cases.” Accordingly, the circuit court ruled, the district court had not abused its discretion by considering the Social Security decision even though it was not part of the administrative record.

The Ninth Circuit then explained that the district court had evaluated de novo whether the plaintiff qualified for “own occupation” benefits, and that the issue was whether his condition rendered him “unable to perform with reasonable continuity” work comparable to the work he had been “regularly performing” beforehand. Because that was a factual determination, the circuit court said that it would review the district court’s conclusion “for clear error.” It found none.

The circuit court acknowledged that the facts might be “susceptible to more than one interpretation,” but it declined to rule that the district court had clearly erred in finding that the plaintiff’s condition rendered him unable to perform work comparable to his prior job duties. Moreover, the circuit court said that the district court also had not clearly erred by relying on the opinions of the plaintiff’s treating physicians, especially given that there was “no blood test or other objective laboratory test” for the plaintiff’s condition.

Finally, the Ninth Circuit pointed out that, absent special circumstances, a prevailing ERISA employee plaintiff ordinarily should receive attorneys’ fees from the defendant. Finding no special circumstances in this case, the circuit court upheld the district court’s decision to award attorneys’ fees.

However, the Ninth Circuit directed the district court to recalculate the amount of attorneys’ fees payable to the plaintiff. Among other things, it said that the district court should use an hourly rate of $500 per hour for the plaintiff’s attorney rather than $675 per hour when making its calculation. [Nagy v. Group Long Term Disability Plan for Employees of Oracle America, Inc., Nos. 16-16160, 17-15491 (9th Cir. June 21, 2018).]

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