Employee Benefit Plan Review – From the Courts

ERISA Preempts Ex-Pro Hockey Player’s State Law Claims

A federal district court in Texas has ruled that the Employee Retirement Income Security Act of 1974 (ERISA) preempts state law claims brought by a former professional hockey player under an ERISA plan, funded by an insurance policy issued to the National Hockey League (the NHL).

The Case

Aaron Rome, a former NHL player, suffered a career-ending injury while playing for the Dallas Stars. He sought disability benefits under a benefits program offered to NHL players by the NHL. The program’s claim administrator issued to the NHL a group policy of insurance to fund benefits payable under the program. The claim administrator adjudicated the claim and issued an adverse benefit determination.

After the claim administrator upheld the adverse benefit determination on appeal, Rome filed a lawsuit in a Texas state court, asserting several state law claims against the claim administrator for allegedly processing his claim improperly.

The claim administrator removed the action to the U.S. District Court for the Northern District of Texas. It argued that because the program was an employee welfare benefit plan under ERISA, federal law preempted Rome’s state law claims, and it moved to dismiss them.

The court granted the motion.

The Court’s Decision

The court first considered whether ERISA governed the program. In its decision, the court found that ERISA governed because the program met the three requirements: the program constituted an employee welfare benefit plan; it did not fall within ERISA’s safe harbor provision; and it was established or maintained by an employer or employee organization for the benefit of employees.

First, the court explained that the NHL – an employer within the meaning of ERISA – offered the program for the benefit of active NHL players and maintained it pursuant to a collective bargaining agreement with the National Hockey League Players’ Association (the NHLPA). The court also noted that the program provided for specific disability benefits for a class of beneficiaries, contained procedures for receiving benefits and a formula for calculating those benefits, defined five categories of employees who might be eligible for benefits, and indicated that the individual NHL teams were responsible for paying the costs of the benefits to a specific fund, administered by a board, that paid the premiums.

Next, the court discussed ERISA’s “safe harbor” provision, which provides that a plan is not governed by ERISA if it meets all four of the following requirements:

1. Neither an employer nor employee organization contributes to the plan;
2. Participation in the plan is completely voluntary on the part of employees or members;
3. The “sole functions of the employer or employee organization with respect to the [plan] are . . . to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer;” and
4. The employer or employee organization “receives no consideration in the form of cash or otherwise in connection with the [plan], other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.”

Here, the court ruled, the program did not satisfy at least three of the safe harbor criteria. If it failed to satisfy only one, then the safe harbor would not apply and as long as the employer or employee association established and maintained the plan, ERISA would apply. The program did not satisfy the first safe harbor criterion because NHL clubs employed NHL players, and the clubs were the only entities that contributed to the fund for premium payments. In addition, the court noted, the NHL and the NHLPA, an employee organization, administered and maintained the program.

The program also did not satisfy the second safe harbor criterion because the NHL and the NHLPA agreed to provide coverage to active NHL players, and the players had no option to decline. Therefore, the court reasoned, their participation was “not voluntary.”

The court also decided that the program did not satisfy the third safe harbor criterion because the NHLPA, an employee organization, and the NHL not only selected the claim administrator but also negotiated the key terms of the program.

Because the program did not meet all four of the safe harbor criteria, it fell outside the safe-harbor provision and it met the second requirement of an ERISA employee benefit plan.

Finally, the court found that the program met the third requirement because the program was established and maintained by an employer or employee organization for the benefit of employees. Specifically, the court pointed out that the NHLPA, with the NHL, established and, with the individual clubs, maintained the program for the benefit of the employees. Accordingly, the program was an ERISA-governed benefit plan.

After determining that the program was an ERISA plan, the court held that ERISA preempts state laws to the extent that they relate to an ERISA plan. The court concluded, therefore, that Rome’s state law causes of action – all of which related to the alleged mishandling of his claim for benefits under an ERISA plan – were preempted by ERISA.

Although the court reached the correct outcome, its analysis lacked precision. The court referred to the plan throughout the decision as a policy. A group insurance policy issued to an employer or employee association is typically nothing more than a funding mechanism for a benefit plan, as it was in this case, as well. The court’s statements that the NHL and NHLPA established and maintained the “policy” demonstrate the imprecision. An employer cannot establish or maintain an insurance policy. An insurance company, typically a plan’s claim administrator, will issue a group policy to an employer to fund benefits payable under a plan.

The court’s preemption analysis also lacked precision. It confused conflict and complete preemption – two separate, albeit related, doctrines. The court began its analysis by quoting from ERISA’s preemption provision, referred to by the courts as conflict preemption. But then the court held that ERISA preempted Rome’s state law causes of action because ERISA provided the exclusive remedy for plan participants or beneficiaries seeking benefits, a complete preemption analysis. [Rome v. HCC Life Ins. Co., No. 3:16-CV-02480-N (N.D. Tex. June 20, 2018).]

Sixth Circuit Affirms Claim Administrator’s Adverse Accidental Death and Dismemberment Benefit Determination Based on Administrative Record

The U.S. Court of Appeals for the Sixth Circuit has affirmed a district court decision rejecting a plaintiff’s challenge under the Employee Retirement Income Security Act of 1974 (ERISA) to a claim administrator’s adverse accidental death and dismemberment (AD&D) benefit determination under an ERISA plan.

The Case

As an employee of Gast Manufacturing, the decedent elected AD&D coverage under Gast’s ERISA plan. The decedent was killed in a head-on motor-vehicle collision. There was some dispute around whether the decedent’s vehicle crossed the double yellow line into oncoming traffic or whether the car the decedent collided with crossed the line.  The investigating police officers questioned witnesses and examined the physical evidence.  The officers determined that the decedent’s vehicle crossed the yellow line. A forensic pathologist performed an autopsy. The pathologist’s final diagnoses of the decedent included “[t]raumatic rupture of abdominal aortic aneurysm”; “[a]rteriosclerotic cardiovascular disease,” which involved “90% narrowing of right coronary artery,” “[a]bdominal aortic aneurysm,” and “[a]cute and subacute infarct of the lateral wall of the left ventricle”; and “[h]ypertensive cardiovascular disease,” which included “[l]eft ventricular hypertrophy” and “[a]rteriolonephrosclerosis.”

The plaintiff, the decedent’s designated beneficiary, sought AD&D benefits under the plan. The claim administrator applied the plan’s exclusion precluding recovery for “any loss . . . to which sickness, disease, or myocardial infarction . . . is a contributing factor” and denied the claim.

The plaintiff appealed the adverse determination. As part of its review, the claim administrator asked a physician to opine regarding the cause of death. The reviewing physician said that blunt trauma from the accident had caused the death but noted that the decedent had suffered an “acute and evolving left ventricle myocardial infarction” leading up to the crash along with other cardiovascular issues. The reviewing physician concluded that there was “compelling evidence” to suggest that the decedent had been incapacitated or dying from an acute/subacute myocardial infarction, and that this myocardial infarction led to the crash.

Relying on the reviewing physician’s opinion, the claim administrator upheld its determination, concluding that “a myocardial infarction contributed to the motor vehicle accident ultimately resulting in [the decedent’s] unfortunate death.”

The plaintiff sued the claim administrator under ERISA, seeking AD&D benefits under the plan. The claim administrator moved for judgment on the administrative record.

The U.S. District Court for the Western District of Michigan, conducting a de novo review based solely on the administrative record, entered judgment in favor of the claim administrator, and the plaintiff appealed to the Sixth Circuit. The plaintiff’s primary argument was that the evidence contradicted the reviewing physician’s conclusion that the decedent likely suffered from a heart attack, causing him to lose control of his car and cross the center line.

The Sixth Circuit affirmed.

The Sixth Circuit’s Decision

The Sixth Circuit first explained that it would review de novo the district court’s findings of law. The court also stated that it could defer to the district court’s findings of fact unless they were clearly erroneous, or it could review them de novo. The court concluded, however, that it did not have to determine which standard to apply, because, based on the administrative record, said the court determined that it would reach the same result in this case whether it reviewed the district court’s findings of fact under either standard. It then reviewed both the law and the facts de novo.

The Sixth Circuit ruled that the reviewing physician offered “the most complete and convincing account of the crash.” According to the court, taken as a whole, the record showed that the decedent “more likely than not” crossed the center line of the highway on which he was driving as a result of a heart attack, striking the other car coming in the opposite direction. Thus, based on the record, the claim administrator correctly applied the exclusion, because the decedent’s likely myocardial infarction contributed to the death. Accordingly, the court affirmed the district court’s decision granting the claim administrator’s motion for judgment on the administrative record. [Hutson v. Reliance Standard Life Ins. Co., No. 17-2453 (6th Cir. July 16, 2018).]

Ninth Circuit Affirms District Court’s Decision Denying Employer’s Motion to Compel Arbitration of Employees’ Claims Under ERISA Plans

The Federal Arbitration Act (“FAA”) generally requires enforcement of agreements to arbitrate disputes. In a recent decision by the U.S. Court of Appeals for the Ninth Circuit, the court considered whether individual employees’ agreements to arbitrate disputes with their employer applied to the employees’ claim for breach of fiduciary duties asserted on behalf of an employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA).  The Ninth Circuit held that if the language of an arbitration agreement applies expressly to disputes between employees and employer, as it did in this case, courts should not compel arbitration of claims an employee asserts on behalf of an ERISA plan, which are not claims for individual relief.

The Case

The plaintiffs, current and former employees of the University of Southern California (USC), participated in two ERISA plans, the USC Retirement Savings Program and the USC Tax-Deferred Annuity Plan. All of the individual plaintiffs had signed an arbitration agreement as part of their employment contracts. The agreement provided that the plaintiffs and USC would arbitrate all claims that the plaintiffs had against USC as well as all claims that USC had against the plaintiffs, including claims for violating federal law. The plaintiffs sued USC on behalf of the plans under 29 U.S.C. § 1132(a)(2), alleging multiple breaches of fiduciary duty over plan administration.

In their lawsuit, the plaintiffs sought financial and equitable remedies to benefit the Plans, including but not limited to a determination as to the method of calculating losses, removal of breaching fiduciaries, a full accounting of the plans’ losses, reformation of the plans, and an order regarding appropriate future investments.

Arguing that the arbitration agreements barred the plaintiffs from litigating their claims for breach of fiduciary duty under ERISA, USC moved to compel arbitration.

The U.S. District Court for the Central District of California denied USC’s motion, determining that the arbitration agreements, which the plaintiffs had entered into in their individual capacities, did not apply to plaintiffs’ 29 U.S.C. § 1132(a)(2) claims, because the plaintiffs brought their claims on behalf of the plans and the agreement do not bind the plans because the agreements are between the employees and USC, not the plans.

USC immediately appealed to the Ninth Circuit, which it had the right to do under the FAA. The court affirmed.

The Ninth Circuit’s Decision

The court began its analysis by considering the FAA, which provides that “a written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The court added that parties could not be compelled to arbitrate “in the absence of an agreement to arbitrate.”

The court then examined the arbitration agreements the plaintiffs had signed and found that they had consented “only to arbitrate claims brought on their own behalf.” According to the court, the language in the arbitration agreements did not extend to claims that other entities, such as the plans, had against USC.

Because the plaintiffs’ claims were brought on behalf of the plans, as all claims are brought under 29 U.S.C. § 1132(a)(2) and the plaintiffs sought remedies for injury to the Plans, the court held that the dispute fell “outside the scope of the arbitration clauses” in the plaintiffs’ employment contracts. Thus, the district court properly denied USC’s motion to compel arbitration. [Munro v. University of Southern California, No. 17-55550 (9th Cir. July 24, 2018).]

Seventh Circuit Affirms District Court Decision Holding ERISA Governs Benefit Plan and Awarding Death Benefits to Designated Beneficiary

The Employee Retirement Income Security Act of 1974 (ERISA) requires employee benefit plan administrators to comply with the governing plan documents. In a recent decision by the U.S. Court of Appeals for the Seventh Circuit, the court held that ERISA-governed life insurance benefits are paid to the designated beneficiary, notwithstanding equitable arguments or claims that others might assert.

The Case

The case concerned a deceased employee who had life insurance coverage under his employer’s benefit plan. He had basic life insurance coverage of $263,000 and supplemental life insurance coverage of $788,000.

The decedent designated his sister, the plaintiff, as the sole and primary beneficiary of both the basic and supplemental life insurance. After the death, the decedent’s ex-wife, the defendant, claimed that she and the decedent’s child were entitled to the supplemental life insurance benefits as a matter of equity.

The plaintiff sued in the U.S. District Court for the Northern District of Illinois. The district court granted plaintiff’s motion for summary judgment, holding ERISA governed the plan, as well as the supplemental life insurance benefits offered thereunder. Accordingly, the district court rejected defendant’s equitable arguments.

The defendant appealed to the Seventh Circuit.

The Seventh Circuit’s Decision

In its decision affirming the district court, the Seventh Circuit explained that ERISA requires plan administrators to administer plans in accordance with the governing plan documents, the plan documents rule, including beneficiary designations. Indeed, the court noted it was “virtually impossible to avoid” a beneficiary designation of ERISA-governed life insurance, which was why the defendant argued that the plan or, at a minimum, the supplemental life insurance coverage in the plan, was not governed by ERISA.

To qualify as an ERISA plan an employee benefit program must be:

1. a plan, fund, or program
2. established or maintained
3. by an employer or by an employee organization, or by both,
4. for the purpose of providing certain benefits, including death benefits,
5. to participants or their beneficiaries.

Postma v. Paul Revere Life Insurance Co., 223 F.3d 533 (7th Cir. 2000).

Applying the five Postma factors, the court held ERISA applied because the plan and the supplemental life insurance provisions therein were part of a program established by the decedent’s employer for the purpose of providing death benefits to plan participants or their beneficiaries.

Under Department of Labor regulations, the so-called safe harbor, employee benefit plans otherwise governed by ERISA, will fall outside of ERISA, if the following four requirements are all satisfied:

1. No contributions are made by an employer;
2. Participation in the plan is completely voluntary for employees or members;
3. The sole functions of the employer with respect to the plan are, without endorsing the plan, to permit an insurer to publicize the plan to employees or members, to collect premiums through payroll deductions and to remit them to the insurer; and
4. The employer receives no consideration in the form of cash or otherwise in connection with the plan, other than reasonable compensation.

29 C.F.R. § 2510.3-1(j). The court was not persuaded by the defendant’s argument that either the plan as a whole or the supplemental coverage fell within the statutory safe harbor because the decedent paid all of the premiums for the supplemental coverage himself without any direct contribution from his employer. The court noted that a benefit plan will not be governed by ERISA if it meets the four conditions of the safe harbor, not just one. It then pointed out that the plan failed the third requirement, e.g., that the “sole functions of the employer or employee organization with respect to the [policy] are . . . to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer.”

The court concluded, the decedent’s employer maintained “substantial administrative functions” beyond the very limited ones allowed by the safe harbor, and thus the plan did not meet the third requirement. Accordingly, the safe harbor did not apply and ERISA governed the plan.  The court also noted that the supplemental life insurance coverage provisions in the plan could not be severed from the rest of the plan, as the defendant argued.  Because ERISA governed the plan, it governed the entire plan, including the supplemental coverage. Thus, the Seventh Circuit affirmed the district court’s decision in favor of the plaintiff. [Cehovic-Dixneuf v. Wong, No. 17-1532 (7th Cir. July 11, 2018).]