Employee Benefit Plan Review – From the Courts – August 2016

Tribal Government’s ERISA Claims Against Blue Cross May Proceed, Court Rules

The Little River Band of Ottawa Indians, a federally recognized Indian tribe, entered into an administrative services contract (ASC) with Blue Cross & Blue Shield of Michigan that provided that the Little River Band was a “self-funded” customer of Blue Cross. As provided in the ASC, the Little River Band paid the medical care costs of its employees from its own funds (up to a stop-loss limit), instead of purchasing health insurance for them. The ASC called for Blue Cross to act as a third-party administrator for health care claims submitted by the Little River Band’s employees.

The ASC did not contain any pricing terms, but the specific fees to be paid by the Little River Band in exchange for the administrative services provided by Blue Cross were enumerated in a series of “Schedule A” documents that were executed by the parties each year in the course of renewing the ongoing service contract. Blue Cross prepared regular statements for the Little River Band reciting the amounts paid for healthcare claims and itemizing various fees authorized by the ASC, and the Little River Band made payments based on those statements.

The Little River Band sued Blue Cross, alleging that it substantially overstated the amounts owing by adding administrative charges that never had been disclosed and that the Little River Band never had agreed to pay. It alleged that Blue Cross charged undisclosed fees under its service contract including amounts classified as “Other Than Group” (OTG) subsidies, “Contingency/Risk” surcharges, “Retiree” surcharges and “Network Access” fees.

The Little River Band also alleged a similar claim with respect to “Physician Group Incentive Program” (PGIP) fees. According to the Little River Band, those fees were retained by Blue Cross as part of the “Administrative Service Fee” that the Little River Band agreed to pay in the Schedule A contract renewal documents. The Little River Band alleged, however, that the charges were not reflected in the amount shown as “Administrative Fees” in annual financial reports about the plan that Blue Cross prepared; instead they were buried within the number reported as “Amounts Billed” by health care providers, rather than itemized under categories reserved for reporting “costs” or “fees.” The Little River Band contended that all of the various disclosure documents supplied by Blue Cross were misleading and failed to disclose adequately the full amount of fees that actually were being charged against the plan by the defendant.

The Little River Band also alleged that Blue Cross had failed to ensure that claims paid to “Medicare-participating hospitals” on behalf of plan beneficiaries who were employees and members of the Little River Band were capped at “Medicare-Like Rates” (MLR). The Little River Band contended that federal regulations limited payments for hospital services made under benefit plans administered by Native American tribal organizations. According to the Little River Band, Blue Cross knew that it was supposed to pay Medicare-participating hospitals at rates no higher than those allowed by Medicare for services rendered to members of the Little River Band covered under the plan, but it failed to cap payments for eligible claims at those rates, and instead “us[ed] Plan assets to pay standard contractual rates on services that were eligible for lower MLR payment rates.”

The Little River Band asserted claims against Blue Cross under the Employee Retirement Income Security Act of 1974 (ERISA) for breach of fiduciary duty and improper self-dealing. Blue Cross moved to dismiss, arguing that ERISA did not cover “governmental plans” and that the complaint did not contain enough specific facts to establish that the Little River Band’s plan was not a governmental plan

The court denied Blue Cross’ motion to dismiss the ERISA claims.

In its decision, the court explained that although ERISA applied to all employee benefit plans created by an employer engaged in interstate commerce or any industry affecting interstate commerce, it did not apply to an employee benefit plan that was a “governmental plan.”

The court then pointed out that the term “governmental plan” included a plan established and maintained by an Indian tribal government, a subdivision of an Indian tribal government, or an agency or instrumentality of either where “all of the participants” are employees of such entity and where “substantially all” of their services are in the performance of essential governmental functions, but not in the performance of commercial activities.

The court then pointed out that the complaint alleged that the plan offered health care benefits “to over 1,000 employees, other tribal members, elected officials, Little River Casino Resort employees, and Little River Trading Post employees.” For purposes of the Blue Cross motion to dismiss, the court ruled, the complaint sufficed to demonstrate that some of the plan participants were engaged in some commercial activities such that “substantially all” of their duties did not encompass the performance of essential, non-commercial governmental functions and that, as a result, the plan was covered by ERISA.

The court acknowledged that discovery might establish that all of the plan participants primarily were engaged in essential governmental functions rather than commercial activities, adding that, if that were true, then the plaintiffs might be vulnerable to dismissal of their ERISA claims on summary judgment or at trial. The court concluded, however, that the allegations in the complaint were sufficient to allow the plaintiffs to survive a motion to dismiss the ERISA claims at the pleading stage of the case. [Little River Bank of Ottawa Indians v. Blue Cross Blue Shield of Michigan, 2016 U.S. Dist. Lexis 55866 (E.D. Mich. April 27, 2016).]

Circuit Court Affirms Dismissal of Former Full-Time Bookkeeper’s ADA Claims Against Church

The plaintiff in this case alleged that she worked full-time as a bookkeeper for a small parish church. She said she took sick leave for 10 months, during which time the pastor of the church took over the bookkeeping duties himself and determined that the job could be done by a part-time bookkeeper.

The plaintiff said that, when she returned from sick leave, there no longer was a full-time bookkeeping position, so the pastor offered her a part-time job, which she declined.

The plaintiff then sued the church, alleging that it had violated the Americans with Disabilities Act of 1990 (ADA) when it failed to return her to a full-time position following her medical leave.

The district court granted summary judgment in favor of the church, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit.

The circuit court affirmed.

In its decision, the Ninth Circuit first assumed that the plaintiff was a qualified individual with a “disability” to bring her claims within the coverage of the ADA, despite the fact that her doctor had cleared her to return to work with “no limitations.”

It then upheld the district court’s decision to grant summary judgment to the church on the plaintiff’s disability discrimination and disparate treatment claims, finding that she had failed to raise a triable dispute as to whether the church’s legitimate, nondiscriminatory reason for not returning her to full-time work was pretextual. The Ninth Circuit then reiterated that ADA cases in the circuit required a plaintiff who alleged disparate treatment to show that a discriminatory reason more likely than not motivated the defendant.

The circuit court also found that the district court had properly granted summary judgment to the church on the plaintiff’s reasonable accommodation claim because the plaintiff failed to establish that a full-time position was available.  [Mendoza v. Roman Catholic Archbishop of Los Angeles, 2016 U.S. App. Lexis 6768 (9th Cir. April 14, 2016).]

Circuit Court Vacates $56,000 Attorneys’ Fee Award in FLSA Case and Remands Case to District Court

In 2006, the plaintiffs brought suit against their employers, Advanta Medical Solutions and Lifecare Management Partners, alleging that they had failed to pay overtime in violation of the federal Fair Labor Standards Act (FLSA). After a number of years, the case proceeded to a jury trial. The plaintiffs prevailed but received only $5,844.29 in damages out of a claim for over $87,000 – largely because the jury and the court rejected their claims for doubled and trebled damages.

Because the plaintiffs successfully recovered unpaid wages, the FLSA entitled them to reasonable attorneys’ fees. Accordingly, the plaintiffs petitioned for $255,898.80 in fees.

The district court accepted this figure as the appropriate “lodestar” – i.e., the most useful starting point for determining the amount of a reasonable fee – but it nevertheless reduced this amount by 75 percent in calculating the final fee award. The district court explained that it was plaintiffs’ counsel’s “inability to provide a meaningful demand for the actual damages suffered” that was “driving” the substantial reduction. According to the district court, “[i]t was not until the eve of trial, and several years into the litigation, that counsel provided th[e] [c]ourt with any calculation of plaintiff’s damages.” This failure to provide a damage demand, according to the court, caused unnecessary delay and a resulting inflation of attorneys’ fees. Therefore, the court concluded that a fee of only $56,474.70 was appropriate and reasonable.

The plaintiffs appealed the fee award to the U.S. Court of Appeals for the District of Columbia Circuit, arguing that the lower court had erred in adjusting the lodestar downward. The employers also appealed, contending that the fee petition should have been reduced more substantially.

The circuit court vacated the lower court’s decision, finding that it had erred when it relied on the plaintiffs’ alleged “inability to provide a meaningful demand for actual damages suffered . . . until the eve of trial” as the primary reason for the fee reduction.

In its decision, the circuit court explained that there was no support in the record for the district court’s finding that the plaintiffs had failed to promptly provide a damages calculation that could have facilitated early settlement.  To the contrary, the plaintiffs had not been negligent or dilatory in providing a damages estimate and that they had done so “time and again, including before they filed suit.” Moreover, the District of Columbia Court of Appeals added, the plaintiffs “even offered an early settlement,” although the employers never responded. It then concluded that the lower court’s “erroneous factual finding” that the plaintiffs had not provided a timely damages estimate required that the lower court decision be vacated and the case remanded to the district court for reconsideration of the attorneys’ fee award. [Radtke v. Caschetta, 2016 U.S. App. Lexis 7990 (D.C. Ct.App. May 3, 2016).]

Circuit Court Reinstates Suit Alleging That Trainees Were Entitled To Be Paid Under the FLSA

When Maryland authorized casinos to operate table games such as blackjack, poker, craps and roulette as of April 11, 2013, PPE Casino Resorts Maryland, LLC (the PPE Casino) recognized that it would have to hire approximately 830 dealers by April 11 to begin operating the planned table games on that date. It determined that it had to develop a training course for new employees. Thus, the PPE Casino developed what it labeled as a “free twelve (12) week table games ‘dealer school’” to be “held in conjunction with Anne Arundel County Community College.” In mid-November 2012, the PPE Casino began advertising employment opportunities for table game dealers and it held information sessions about the jobs and the required “dealer school.”

The plaintiffs in this case, as well as approximately 10,000 other persons, applied for these advertised positions. The PPE Casino asked select applicants, including the plaintiffs, if they would like to attend a course to become a dealer and explained that the course would be free, last 12 weeks and would teach them “how to conduct table games.”

The PPE Casino selected approximately 830 of the applicants to attend the dealer school, which consisted of four hours of daily instruction Monday through Friday, offered in four time periods. The dealer school was scheduled to run for 20 hours per week for 12 weeks. The PPE Casino conducted the dealer school from January 7, 2013 to April 1, 2013, ending 10 days before the start of legalized table games in Maryland.

According to the plaintiffs, the training at the dealer school “was specific to the manner in which” the PPE Casino’s employees were “to perform the[] table games.” They contended that, although the PPE Casino advertised the dealer school as being held in conjunction with a community college, it actually was run completely by the PPE Casino – and that the PPE Casino authored all course materials, its employees provided all instruction, and the attendees never interacted with anyone from a community college. During the dealer school, the plaintiffs asserted, the attendees completed employment forms, including an income tax withholding form and direct deposit authorization form. To help the attendees receive a gambling license by the end of the course, the PPE Casino required them to submit to a drug test, provide their fingerprints and Social Security numbers, and authorize the PPE Casino to obtain their driving records and perform criminal and financial background checks on them.

One of the plaintiffs attended the dealer school for approximately eight weeks; another attended for 11 weeks; and the third attended for all 12 scheduled weeks and worked as a dealer at the PPE Casino. They said that the PPE Casino did not pay the first two plaintiffs at all, but did pay the third plaintiff and others who attended the dealer school for the full 12 weeks the minimum wage, $7.25 per hour, for the final two days of the dealer school.

The plaintiffs sued the PPE Casino, asserting violations of the federal Fair Labor Standards Act (FLSA), among other things.

The PPE Casino moved to dismiss the complaint, arguing that the plaintiffs had not demonstrated that they had provided the PPE Casino with any work or that the PPE Casino had received any benefit during the time they attended the dealer school because the PPE Casino did not operate table games at that time. The district court granted the motion to dismiss, holding that the plaintiffs had “fail[ed] to show that the primary beneficiary of their attendance at the training was the [PPE] Casino rather than themselves.”

The plaintiffs appealed to the U.S. Court of Appeals for the Fourth Circuit, which reversed.

In its decision, the circuit court observed that “work” for FLSA purposes broadly encompassed “physical or mental exertion (whether burdensome or not) controlled or required by the employer” primarily for its benefit. Moreover, the circuit court continued, “training” could constitute “work” under the FLSA. Thus, it said, the fact that the PPE Casino could not operate table games during the dealer school did not necessarily mean that the plaintiffs were not working for FLSA purposes in attending the required “school.” The Fourth Circuit added that whether the required training constituted work for FLSA purposes depended on whether it primarily constituted a benefit to the employer or the trainee.

The circuit court noted that the plaintiffs alleged that the PPE Casino had received a “very large and immediate benefit” – an entire workforce of over 800 dealers trained to operate table games to the PPE Casino’s specifications at the very moment the table games became legal. In addition, the plaintiffs contended that they received very little from the 12 weeks of training that did not primarily benefit the PPE Casino because the training was unique to the PPE Casino’s specifications and not transferrable to work in other casinos.

The Fourth Circuit also observed that the plaintiffs alleged that the “sole purpose” of the PPE Casino’s “temporary makeshift ‘school’ was to hire the exact number of dealers needed to fill the vacant table games positions” and that the PPE Casino “disguised its employee-training course as a school for the purpose of not paying” the trainees. If true, the circuit court said, a jury or trial court could conclude that requiring applicants to attend a training “school” for 20 hours each week for a full 12 weeks – training advertised to be associated with a community college course but that allegedly had nothing to do with any college – demonstrated that the PPE Casino had “conceived or carried out” its “school” to avoid paying the minimum wage.  It added that a jury or trial court also could conclude that an employer only would take such actions to avoid paying the minimum wage to persons who were labelled “trainees” but who actually worked for the PPE Casino and were employees for purposes of the FLSA .

Indeed, the circuit court added, if the PPE Casino had implicitly promised the plaintiffs a job if they attended all 12 weeks of the “school,” the plaintiffs might have been employees “from the beginning.”

Finally, the Fourth Circuit added, the fact that the PPE Casino paid all participants in the dealer school the minimum hourly wage for the last two days of the 12 weeks of training “certainly” suggested that the PPE Casino regarded the participants in the dealer school as employees doing work for those two days.

Accordingly, the circuit court held that the plaintiffs had alleged sufficient facts to state a claim that the PPE Casino had violated the FLSA and to survive the PPE Casino’s motion to dismiss. [Harbourt v. PPE Casino Resorts Maryland, LLC, 2016 U.S. App. Lexis 7415 (4th Cir. April 25, 2016).]

Comment:  Importantly, the circuit court specifically noted that while it held that the plaintiffs had alleged sufficient facts to survive the PPE Casino’s motion to dismiss, it expressed “no opinion” as to whether the “dealer school” constituted “work” or whether the plaintiffs constituted “employees” for FLSA purposes.

Circuit Court Upholds Decision Discontinuing Benefits for Mental Illness After 24 Months

In this case, the plaintiff worked at Allstate Insurance Company, where she was enrolled in a long-term disability (LTD) insurance coverage plan provided by Liberty Life Assurance Company of Boston. Contending that she suffered from, among other things, major depressive disorder and borderline personality disorder, the plaintiff sought LTD benefits under the policy, which she received.

Liberty viewed the plaintiff’s disability as a mental illness and, because of the plan’s 24-month limitation on benefits for “mental illnesses,” Liberty discontinued her benefits after two years.

After exhausting her administrative appeals, the plaintiff sued Liberty under Section 502(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (ERISA), seeking continuation of those benefits until her disability ended. The plaintiff argued that the 24-month limitation provision did not apply to mental illnesses that had a so-called “organic” cause, and that her mental illness had such a cause.

The district court entered judgment in favor of Liberty. In support of its ruling, the district court concluded, among other things, that Liberty had presented substantial evidence that the plaintiff suffered from a mental illness that had a psychiatric cause. The plaintiff appealed to the U.S. Court of Appeals for the Sixth Circuit, arguing that “organic, cognitive disorders” were not subject to the policy’s mental illness provision. She also contended that her diagnosis of “cognitive disorder, not otherwise specified” indicated that her condition was due to a “physiological effect of a general medical condition,” which she characterized as an “organic” disorder.

The Sixth Circuit affirmed, agreeing with the district court that substantial evidence supported Liberty’s decision that the plaintiff was not entitled to benefits beyond 24 months under the policy.

In its decision, it pointed out that reports and statements of various medical professionals supported the conclusion that the plaintiff had a mental illness. The circuit court added that the plaintiff did not contest that major depressive disorder and borderline personality disorder were classified as psychiatric conditions in the Diagnostic and Statistical Manual of Mental Disorders (DSM) and, therefore, met the policy’s definition of “mental illness.” Moreover, the circuit court continued, the plaintiff did not contest that she has these disorders. Accordingly, the circuit court concluded that Liberty’s termination of the plaintiff’s benefits after the 24-month period was “well-supported by substantial evidence.”

Finally, the Sixth Circuit ruled that Liberty’s decision to terminate the plaintiff’s benefits was a result of a “deliberate, principled reasoning process”, given that Liberty did not ignore any contrary and reliable evidence. Finding that Liberty did not have to provide evidence that the plaintiff’s mental illness had an “organic cause” when she could not accomplish that herself – and stating that it assumed without deciding that the policy’s 24-month limitation did not apply to mental illnesses with organic causes – the circuit court affirmed the district court’s decision. [McAlister v. Liberty Life Assurance Co. of Boston, 2016 U.S. App. Lexis 8374 (6th Cir. May 4, 2016).

Reprinted with permission from the August 2016 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.