Employee Relations Law Journal – From the CourtsJune 19, 2018 | Ian S. Linker | |
Fifth Circuit Affirms Decision Denying Attorney’s Fees to Insurer in ERISA Action
A party in a case under the Employee Retirement Income Security Act of 1974 (ERISA) may be eligible to recover its attorney’s fees under 29 U.S.C. § 1132(g)(1) if it achieved “some degree of success on the merits.” District courts have broad discretion whether to award fees under ERISA, but a recent decision by the U.S. Court of Appeals for the Fifth Circuit highlights that even a successful party may not be eligible to recoup its attorney’s fees if the court needs to conduct a lengthy inquiry into whether the prevailing party achieved some success on the merits.
Victory Medical Center Houston, LP, and other health care providers, sued various insurance companies, including CareFirst of Maryland, Inc. The plaintiffs claimed they had provided treatment to patients who had health insurance coverage provided by the defendant insurers, but that the insurers had denied their claims for payment or had “unilaterally reduced the amount of payment to an unacceptable and unsustainable level,” in violation of ERISA, the Federal Employees Health Benefits Act (FEHBA), and state law.
The U.S. District Court for the Northern District of Texas granted the defendants’ motions to dismiss and dismissed all of the plaintiffs’ claims, except for their claims for statutory penalties for failing to provide information upon request as required under ERISA. The plaintiffs agreed to dismiss this claim against the defendants if they withdrew a discovery-related motion they had filed. The defendants agreed and withdrew their motion; thus, the plaintiffs dismissed the remaining claim.
The defendants then asked the district court to award them attorney’s fees under 29 U.S.C. §1132(g)(1). The plaintiffs opposed the request.
The district court denied the motion. The court stated that “based on the arduous procedural history of this action,” it could not “fairly call the outcome of the litigation some success on the merits without conducting a lengthy inquiry” into whether the defendants’ success was not based on a “purely procedural victory.” The court further explained that even if the defendants were eligible for attorney’s fees, such an award was not appropriate in this case because the defendants had not satisfied the five-factor test established by the Fifth Circuit in Iron Workers Local No. 272 v. Bowen, 624 F.2d 1255 (5th Cir. 1980).
CareFirst appealed to the Fifth Circuit.
A party seeking attorney’s fees under ERISA must show that it achieved “some degree of success on the merits” before a court will consider whether it is appropriate to award attorney’s fees. A party satisfies this requirement if the court can fairly call the outcome of the litigation “some success on the merits” without conducting a lengthy inquiry into the question of whether its success occurred on a central issue or was otherwise substantial.
Once a court determines a party is eligible for a fee award, the court then should consider whether it is appropriate to award fees. When determining whether to award attorney’s fees under ERISA, a court in the Fifth Circuit should consider the five Bowen factors:
- The degree of the opposing parties’ culpability or bad faith;
- The ability of the opposing parties to satisfy an award of attorney’s fees;
- Whether an award of attorney’s fees against the opposing parties would deter other persons acting under similar circumstances;
- Whether the parties requesting attorney’s fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA itself; and
- The relative merits of the parties’ positions.
Even though a court’s decision to apply these factors, like the decision whether to award fees at all, is discretionary, in that district courts may make fee determinations without considering the Bowen factors, courts typically apply them.
The Fifth Circuit’s Decision
In affirming the district court, the Fifth Circuit determined that the district court had not abused its discretion.
The court recognized that the district court had determined that the “arduous procedural history” of the case prevented it from determining that the defendants had achieved success on the merits. The court added that the district court’s reasoning, however, had not ended with this threshold determination.
Instead, the court observed, the district court reasoned that, even if the defendant was eligible for fees, a fee award was not warranted in the case. Indeed, the district court explained that there was no evidence that the plaintiff had acted in bad faith and that, in any event, the other Bowen factors did not support a fee award to the defendants.
The Fifth Circuit concluded that, given the district court’s analysis of the statutory requirements as well as the Bowen factors, the district court had not abused its discretion in declining to award attorney’s fees.
The case is Victory Medical Center Houston, L.P. v. CareFirst of Maryland, Inc., No. 15-10053 (5th Cir. Jan. 2, 2018).
District Court Finds Rational Support in the Record and Upholds a Claims Fiduciary’s Determination That Plaintiff Was Not Disabled Under ERISA-Governed LTD Plan
Under the Employee Retirement Income Security Act of 1974 (ERISA), courts review a fiduciary’s benefit determination de novo unless the ERISA-governed benefit plan grants the fiduciary discretionary authority, in which case the court applies the deferential arbitrary and capricious standard of review. In a recent decision by the U.S. District Court for the Northern District of Indiana, the court upheld a fiduciary’s adverse benefit determination applying the abuse of discretion standard, notwithstanding the court’s statements that it disagreed with the determination. But after recognizing that there was rational support in the record for both the benefit determination and the plaintiff’s claim for benefits, the court upheld the determination.
The plaintiff in the case last worked on January 2, 2008 as a software engineer manager for Oracle USA and stopped working due to fatigue and severe chronic migraine headaches.
The plaintiff applied for and received short term disability benefits under the plan. In early March 2014, the plaintiff filed a claim for long term disability benefits under the plan. The defendant claim administrator denied the claim. The plaintiff administratively appealed and the defendant upheld its initial determination.
The plaintiff then sued the plan’s claim administrator, and the parties moved for summary judgment.
Under ERISA, a plaintiff may bring a lawsuit to recover benefits under an ERISA-governed employee benefit plan. Courts review an adverse benefit determination de novo unless the plan grants the plan’s claim administrator discretionary authority to determine eligibility for plan benefits and construe the terms of the plan.
Courts will apply the deferential arbitrary and capricious standard of review when a plan grants discretion and typically will uphold an adverse benefit determination if there is “rational support” or substantial evidence in the record to support the determination.
The District Court’s Decision
Because the plan granted discretion to the defendant, the district court applied the arbitrary and capricious standard of review and granted summary judgment in the defendant’s favor.
Under the plan, to receive long term disability benefits the plaintiff had to demonstrate (among other things) that he had been unable to perform the material duties of his regular occupation due to sickness or injury from January 2, 2008 and for 24 months thereafter.
The district court recognized that throughout the administrative process the defendant acknowledged the plaintiff’s history of migraine headaches and fatigue. Nevertheless, in the initial determination and in its determination on the plaintiff’s appeal, the defendant concluded that those conditions had not rendered the plaintiff unable to “perform the material duties of [his] regular occupation,” as required under the plan. The defendant determined that the plaintiff had “retained the ability to perform the material duties of [his] regular occupation” as of January 2, 2008 and, accordingly, was not totally disabled under the plan.
The district court noted that the plaintiff had submitted evidence from three treating physicians, all of whom had treated the plaintiff well after he stopped working, and all of whom opined that the plaintiff was disabled during a time when they were not the plaintiff’s treating physician. Nevertheless, the district court opined that the plaintiff had provided “substantial medical evidence” in support of his claim that he had disabling chronic fatigue syndrome. Although there was medical evidence to the contrary, the district court said that it was “inclined to believe that the greater weight of the evidence” supported the plaintiff’s disability claim.
The district court held, however, that the defendant’s determination also had “rational support in the record”; thus, under the arbitrary and capricious standard, the court upheld the defendant’s determination. Accordingly, the court was constrained to find in the defendant’s favor even though in the court’s view a preponderance of the evidence supported a finding of disability. The court “reluctantly affirm[ed] the plan’s decision under the arbitrary and capricious standard.” The court concluded, “[R]eaching a decision amid … conflicting medical evidence is a question of judgment that should be left to [the defendant] under the arbitrary-and-capricious standard.”
The case is Fessenden v. Reliance Standard Life Ins. Co., No. 3:15CV370-PPS (N.D. Ind. Jan. 17, 2018).
District Court Refuses to Compel Arbitration in ERISA Suit for Breach of Fiduciary Duties
An employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), like other contracts, may contain a provision requiring arbitration of benefit disputes. A federal court in Indiana recently refused to compel arbitration because the ERISA-governed pension plan document containing the arbitration provision was not in effect until a year after the plaintiff’s final distribution under the plan and other employment-related documents did not require arbitration of an ERISA benefits dispute.
The plaintiff in this case worked for Charles Schwab & Co., Inc., for a number of years. During that time, he participated in the SchwabPlan Retirement Savings and Investment Plan, a defined contribution, individual account plan sponsored and administered by Charles Schwab that was governed by ERISA.
The plan offered various Schwab-managed investment options, including the Schwab S&P 500 Index Fund, seven Schwab mutual funds, 10 Schwab “target date” funds, a Schwab money market fund, and a deposit account in the Schwab Bank.
The plaintiff left Schwab and then filed a putative class action ERISA lawsuit, alleging that the Schwab-affiliated funds had charged higher fees and had performed more poorly than other investment options. According to the plaintiff, the Schwab entities had violated their fiduciary duties to the plan in offering these Schwab-affiliated funds without “meaningful investigation” into whether they were prudent investments and whether there were better options available. The plaintiff brought claims under ERISA, 29 U.S.C. § 1132(a)(2), to recover losses to the plan resulting from the defendants’ alleged fiduciary breaches and prohibited transactions and pursuant to 29 U.S.C. § 1132(a)(3) to recover injunctive and other equitable relief.
The defendants moved to compel arbitration of the plaintiff’s claims. They contended that arbitration of the ERISA claims was required under the plan document, the “Form U-4” the plaintiff signed as required by the rules of the Financial Industry Regulatory Authority (FINRA), and an acknowledgment that he signed in connection with his compensation agreement.
The Federal Arbitration Act (FAA) provides that any agreement within its scope “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The FAA represents a liberal federal policy favoring arbitration, notwithstanding any state substantive or procedural policies to the contrary.
Under the FAA, a party to a valid arbitration agreement may petition a federal district court “for an order directing that such arbitration proceed in the manner provided for in such agreement.” In considering a motion to compel arbitration, a court considers “whether a valid arbitration agreement exists” and “whether the agreement encompasses the dispute at issue.” If both conditions are met, the court generally will enforce the agreement to arbitrate.
The District Court’s Decision
After conducting this analysis, the court denied the defendants’ motion.
In its decision, the court first rejected the defendants’ argument that the plan document bound the plaintiff to arbitrate his claims. The court noted that the effective date of the plan document the defendants relied upon was over a year after the plaintiff had terminated his participation in the plan. And because there was “no authority supporting [the defendants’] contention that a plan document executed after the participant has ceased participation in the plan can bind the participant to arbitration,” the court ruled that it did “not apply to his claims.”
The court also rejected the defendants’ contention that the arbitration provision in the Form U-4 encompassed the claims the plaintiff brought against the defendants in his lawsuit.
The court pointed out that Form U-4’s arbitration provision stated:
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or by-laws of the [self-regulatory organizations (“SROs”)] indicated in Section 4 (SRO REGISTRATION).
According to the court, the Form U-4 did not require arbitration of every dispute between the plaintiff and the Schwab defendants, but instead required arbitration of disputes that were required to be arbitrated under the rules, constitutions, or by-laws of certain SROS. The court observed that the provision mentioned “nothing whatsoever” about the plan, and said that the defendants had failed to explain adequately why the language of this provision included the plaintiff’s ERISA claims against them.
Similarly, the court concluded that the compensation agreement’s arbitration provision was limited to claims “arising out of or relating to the [plaintiff’s] employment or the termination of employment.” The court was not persuaded by the defendants’ contention that the plaintiff’s breach of fiduciary duty claims were covered by the compensation agreement. The court noted that the defendants themselves had elsewhere contended that ERISA claims were not ordinarily viewed as “work-related legal claims.”
In any event, the court noted the arbitration provision contained an exception for “claims for benefits under any ERISA-governed employee benefit plan(s),” which were to be resolved according to the “claims procedures under such benefit plans.” Accordingly, because the plaintiff’s claims did not arise under the compensation agreement but under the plan, they were governed by the claims procedures of the plan.
The court concluded that even if the arbitration provisions cited by the defendants encompassed the plaintiff’s claims, they could not be enforced. The court reasoned that the plaintiff brought his claims pursuant to 29 U.S.C. §§ 1132(a)(2) and (a)(3) “on behalf of the plan,” and that he could not waive rights belonging to the plan, including the right to file suit in court.
The court also noted that the plan document had been executed “unilaterally by the plan sponsor, Charles Schwab.” The court said that a plan document drafted by fiduciaries – “the very people whose actions have been called into question by the lawsuit” – should not prevent plan participants and beneficiaries “from vindicating their rights in court.”
The case is Dorman v. Charles Schwab & Co., No. 17-cv-00285-CW (N.D. Cal. Jan. 18, 2018).
Plan’s Claim Administrator Could Offset Plaintiff’s Earnings Against His Disability Benefits, Sixth Circuit Decides
In a recent decision, the U.S. Court of Appeals for the Sixth Circuit held that the provisions of an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) permitted the defendant claim administrator to offset a plan participant’s earnings as a political consultant against disability benefits payable to him under the plan.
The plaintiff was an attorney at a law firm that established and maintained a long-term disability income plan governed by ERISA. The plan offered both total and partial disability benefits to eligible participants.
The plaintiff was diagnosed with Parkinson’s disease, and he applied for total disability benefits. The defendant claim administrator approved his application. The plan required the claim administrator to reduce a claimant’s disability benefits by any other income benefits the claimant received.
As such, the defendant asked the plaintiff if he had any other sources of income. The plaintiff reported that he was working as a consultant for a political campaign.
Thereafter, the defendant reduced the plaintiff’s monthly benefits to reflect those consulting earnings. After the defendant denied the plaintiff’s requests to stop offsetting his benefits, the plaintiff filed a putative class action lawsuit against the claim administrator. The defendant filed a motion to dismiss on the grounds that the clear terms of the plan required the claim administrator to reduce the plaintiff’s disability benefits by any other income benefits, including earnings, and because the plan granted discretion to the claim administrator, its determination to offset the plaintiff’s earnings could not have been an abuse of discretion.
The U.S. District Court for the Western District of Kentucky agreed with the defendant and dismissed the plaintiff’s complaint for failure to state a claim. The plaintiff appealed to the Sixth Circuit.
A court of appeals reviews de novo a district court’s decision on a motion to dismiss for failure to state a claim. To survive a motion to dismiss, a complaint must contain “sufficient factual matter, accepted as true,” to “state a claim to relief that is plausible on its face.”
Because at issue was the defendant’s motion to dismiss, the Sixth Circuit had to determine whether the facts the plaintiff alleged in the complaint, taken as true, plausibly showed that the claim administrator arbitrarily and capriciously interpreted the plan and denied the plaintiff’s claim for unreduced benefits.
The Sixth Circuit’s Decision
In its decision affirming the district court, the Sixth Circuit explained that the claim administrator was required to reduce the amount of monthly disability benefits by certain other income benefits under the plan.
The Sixth Circuit held the plaintiff’s consulting earnings constituted “Other Income Benefits” under the plan. In its analysis, the court determined that the first paragraph of the plan’s Other Income Benefits section affirmed that “Earnings” should be an offset to benefits under the plan:
OTHER INCOME BENEFITS means benefits, awards, settlements or Earnings from the following sources. These amounts will be offset, in determining the amount of the Insured Employee’s Monthly Benefit. Except for Retirement Benefits and Earnings, these amounts must result from the same Disability for which a Monthly Benefit is payable.
The plan defined Earnings as “pay the Insured Employee earns or receives from any occupation or form of employment, as reported for federal income tax purposes.” The court held that the plaintiff’s income from his political consulting work qualified as Earnings; thus, it constituted Other Income Benefits under the plan.
Therefore, the Sixth Circuit concluded, the plan allowed the defendant to consider that income when calculating his monthly benefit, and the plaintiff had not alleged that the defendant had acted arbitrarily and capriciously by offsetting his consulting earnings when calculating benefits. Indeed, the court stated, that plaintiff “fail[ed] to plausibly allege that [the defendant] acted arbitrarily and capriciously because the plain language allows [the defendant] to consider his consulting earnings when calculating his benefits.”
The case is Barber v. Lincoln National Life Ins. Co., No. 17-5588 (6th Cir. Jan. 23, 2018).
- Ian S. Linker