This article covers ERISA cases in the Supreme Court, Second Circuit, District of Connecticut, and ERISA issues arising from the Affordable Care Act. They are intended to include a balanced selection of national and local cases regardless of whether the case is favorable to claimants or the plans. The practice notes and case commentaries reflect the fact that the author is a claimants’-side attorney, but he hopes the materials will be useful to both sides of the ERISA litigation forum. The materials do not cover ERISA compliance or multi-employer plans.
These materials assume some basic familiarity with ERISA litigation such as standards of review, what plans subject to ERISA and the administrative review process. ERISA litigation updates from prior years provide more background explanation. If you would like prior years’ updates, please email me and I would be happy to send them to you.
I. Supreme Court
A. Recent Supreme Court Cases
Contractual Limitations Periods in Plans: Heimeshoff v. Hartford Life
The most significant Supreme Court ERISA case was Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S. Ct. 604 (2013) where the court enforced a limitations period to file suit for denial of long-term disability benefits contained in the plan documents rather than the longer statutory limitations period. The case originated in the District of Connecticut in a decision by Judge Arterton enforcing the plan’s limitations period. Heimeshoff v. Hartford Life & Accident Ins. Co., 2012 U.S. Dist. LEXIS 6882 (D. Conn. Jan. 16, 2012).
The claimant stopped working June 8, 2005. She filed a claim for long-term disability benefits on August 22, 2005. The insurer requested additional medical information in November 2005, which the claimant did not obtain. The insurer denied the claim the following month, informed her of the 180 day period to appeal, and stated that it would reopen the claim without need to appeal if the missing information was submitted. In July 2006, the claimant submitted a statement from another physician that she was disabled. The insurer conducted a file review and in November 2006 discontinued her benefits. The claimant requested an extension of the deadline for filing an additional appeal to September 2007. After two more physicians reviewed the claim for the insurer, it issued a final denial on November 26, 2007. Almost three years later, the claimant filed suit on November 18, 2010. Judge Arterton held that the contractual limitation period was enforceable, and the Second Circuit affirmed. 496 Fed. Appx. 129 (2012).
The claimant argued that statutes of limitation only start to run once a cause of action accrues. Since ERISA requires administrative exhaustion, a cause of action doesn’t accrue until the administrative process is completed, so the three-year statute of limitations couldn’t start running until the completion of the administrative process. Justice Thomas, writing for the unanimous court, rejected the argument, holding that contractual limitations period are enforceable if they are reasonable. He stated this was particularly true for ERISA plans, considering the latitude ERISA gives plan sponsors to decide on the terms of the plan, and the importance of the plan documents themselves in ERISA administration and litigation. 134 S. Ct. at 612. Therefore, the Court would enforce the contractual limitations period unless the time was unreasonably short, or a statute barred enforcement of a shorter limitations period.
The Court found that the three year period started when the proof of claim which was required was reasonable. Even with the lengthy appeal process in the case, the claimant still had a year to file suit after the denial of the final appeal. Further, the Court rejected the argument that ERISA prohibited enforcement of the shorter limitations period. The claimant argued that allowing a shorter limitations period would undermine ERISA’s two-tier process of benefit decisions, involving first an administrative appeal and then administrative review of that determination, if claimant had to file suit before the administrative process was done, or shortly after it was concluded. The Court stated that the claimant was able to cite to few cases where a claimant completing the administrative appeals had less than one year to file suit. 134 S. Ct. at 615. The Court stated that if such an instance arose, a court could apply traditional principles of waiver or estoppel to prevent the administrator from asserting the limitations period when it was guilty of unreasonable delay, or equitable tolling if the claimant had diligently pursued the appeal but was prevented from filing suit due to extraordinary circumstances.
The decision has some real practical consequences of claimants, despite the Court’s contention that the shorter limitations period will rarely permit claimant’s less than a year to file suit. Sometimes the appeal process is quite drawn out. For instance, in one claim the author was involved in, the plan denied that it was an ERISA plan and did not provide a copy of the claim file. Once the client had appealed several times herself, and a lengthy process of counsel convincing the plan to afford an ERISA-compliant review, little time would have been left to file suit if the plan hadn’t granted benefits. Equitable relief may not have been available as the client had not been diligent throughout the entire process, which might have been the case during times she was battling her disability. And, what the courts consider to be a reasonable time can be short. In Tuminello v. Aetna Life Ins. Co., 2014 U.S. Dist. LEXIS 20964, 5 (S.D.N.Y. Feb. 14, 2014), the court found nine months to be ample time to file suit before the plan’s limitations period expired. However, nine months is not necessarily enough time to find an attorney willing to handle an ERISA claim, have that attorney obtain the claim file and review it, all while dealing with the emotional and financial challenges of a disability.
The contractual limitations period also applies to benefit discontinuation cases, when the insurer stops benefits after paying for some period of time. The date cannot run from the date the proof of loss is required because any suit would be barred when benefits had been paid for more than three years. Therefore, courts will apply the three-year period from the date of the final denial. Prabhakar v. Life Ins. Co. of North Am., 2013 U.S. Dist. LEXIS 116151, 41-42 (E.D.N.Y. Aug. 16, 2013). Since many state contractual limitations periods are six years, such as Connecticut’s under Conn. Gen. Stat. § 52-576, Heimeshoff will affect benefit cessation cases as well.
Severance is Taxable Wages: United States v. Quality Stores, Inc.
The Supreme Court in United States v. Quality Stores, Inc., 134 S. Ct. 1395 (U.S. 2014) confirmed that severance payments, which are usually covered by ERISA, are taxable wages on which FICA is due. The Court determined that severance payments, although paid after the employment relationship ended, are made in consideration for employment and, therefore, fall within the definition of wages. The Court’s decision did not affect the treatment of benefits paid by a Supplemental Unemployment Benefit Plan, where the employer sets up a trust to pay amounts to supplement state unemployment benefit to pay the employees what they had earned in their job. 1
B. Cases Interpreting Prior Significant Supreme Court Decisions: Amara, Dukes and McCutchen
The most important Supreme Court cases over the last several years were the Amara, Dukes and McCutchen cases. The cases are summarized below, and cases from the last year addressing the issues the cases raised are discussed.
1. Cigna v. Amara
One of the most important ERISA cases in the last few years is Cigna Corp. v. Amara, 131 S. Ct. 1866 (2011). The case originated in the Connecticut District Court with a decision by Judge Kravitz. Amara addressed two major issues in ERISA litigation: the effect of provisions that are in the SPD but not the plan, and the types of equitable relief available for plaintiffs under ERISA. The Amara court overruled the law of some circuits that plan in the event of an inconsistency between the SPD and the plan, stating the SPD provisions could be enforced as part of the plan. The significance of this holding is that if the SPD provision is part of the plan, then it can be enforced under Section 502(a)(1)(B), which is ERISA's breach of contract provision. This gave plaintiffs a way to enforce promises that were in the SPD but not in the plan. This theory is therefore no longer viable.
While the Court did not allow the SPD to be incorporated in the plan, it held that traditional equitable remedies were available to potentially enforce provisions of the SPD, even when it was not part of the plan. The court held that there were three traditional equitable remedies that could afford relief when an SPD was inconsistent with the plan: estoppel; reformation of the plan; and surcharge. The Court remanded the case to determine what relief would be available under 502(a)(1) (b). On remand, Judge Arterton held that the relief afforded by Judge Kravitz in the original decision under 502(a)(2) was also available under 502(a)(1)(b). Amara v. Cigna Corp., 925 F. Supp. 2d 242 (D. Conn. 2012). CIGNA appealed the decision, and the case was argued on February 10, 2014.
In Osberg v. Foot Locker, Inc., 2014 U.S. App. LEXIS 2692, 6-7 (2d Cir. N.Y. Feb. 13, 2014), the Second Circuit clarified what a plaintiff must plead to adequately state a claim to equitable relief. The case involved a claim of inadequate notice of a conversion from a defined benefit plan to a cash balance plan. The District Court granted summary judgment to the plan on ground that the plaintiff had failed to show “actual harm,” and so could not bring a reformation claim. The court overturned decision, saying a showing of actual harm was not required, and remanded the case for the district court to determine if the plaintiff had satisfied the requirements for reformation.
C. Wal-Mart v. Dukes
The Supreme Court in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) indicated that a Fair Pay Act case could not be maintained as a Rule 23(a)(2) class action since individual determinations of discrimination had to be made for each plaintiff. Rule 23(a)(2) class actions bind class members even though there is no notice and opportunity to opt-out. When the case came down, many commented that the same principles could restrict Rule 23(b) (2) class actions in ERISA to the extent individual damage claims were involved. The Court explicitly stated its decision did not affect Rule 23(b)(3) class actions that provide for potential class members with notice and an opportunity to opt-out.
In Haddock v. Nationwide Fin. Servs., 293 F.R.D. 272, 280 (D. Conn. 2013), Judge Underhill made clear that Dukes holding that individual issues make classes difficult when issues of individual relief are present only applies to Rule 23(a)(2) class actions. Judge Underhill had allowed a 23(a)(2) class action in a case alleging the plan fiduciaries violated their fiduciary duty under ERISA by accepting “revenue sharing payments” from mutual funds offered to the participants. After Dukes, the Second Circuit reversed the decision allowing a Rule 23(a)(2) class action and remanded the case to determine if a Rule 23(a)(3) class action could be maintained, which Judge Underhill found to be the case.
In US Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (U.S. 2013), the Supreme Court allowed a plan to enforce a reimbursement provision that resulted in the plan participant being in far worse shape for bringing a personal injury suit than if he had never brought it. McCutchen was involved in a car accident. The medical benefit plan paid $66,866 on his behalf. McCutchen only recovered $110,000 in damages from the accident, and his net recovery was less than $66,000. The Plan demanded the entire recovery under the plan’s reimbursement provision, including amounts that went to the claimant’s PI attorney for fees and costs. If the plan won, McCutchen would have to pay over his entire net award, and come out of pocket another $25,000 to pay for the portion of the award that went for fees and costs.
The Court unanimously held that there were no equitable principles that could overcome the explicit plan provision that the plan was entitled to be paid out of the recovery from the third party, rather than being paid out of the funds actually received by the participant. The Supreme Court did note that the language of the plan did not negate the Common Fund Doctrine (which would reduce the plan’s lien to the same extent McCutchen’s recovery was reduced by fees and costs), or whether the plan should bear any share of the attorneys’ fees and costs spent to obtain the recovery. A five to four majority remanded the case for a determination of how much the plan’s reimbursement should be reduced by the attorneys’ fees that had to be paid. The court said a plan could provide in the plan documents that the right to reimbursement would not be affected by the Common Fund Doctrine or any sharing of costs to obtain the recovery. One can expect that plans will do so, and the Court’s allowance of consideration of this doctrine in the absence of a plan provision to the contrary will be moot.
Diagnostics v. Bomani, 2013 U.S. Dist. LEXIS 85747, 13-14 (D. Conn. June 19, 2013) (Shea). The court enforced a reimbursement provision, stating that the reimbursement obligation was clear and negated the potential equitable principles the Court proposed in McCutcheon. In this case, the amount the plan was seeking was only a small part of the total award.
ACS Recovery Servs. v. Griffin, 723 F.3d 518, 528 (5th Cir. Tex. 2013). Court allowed reimbursement from a special needs trust where the funds from the personal injury settlement were used to purchase an annuity that then funded the special needs trust. The Court rejected the argument that reimbursement should not be allowed because the plan participant had never had actual possession of the settlement funds.
II. The Affordable Care Act and ERISA
A. The Affordable Care Act: Provisions regarding Processing and Appeals of Medical Benefit Denials
President Obama’s health care law, the Patient Protection and Affordable Care Act (“ACA”) instituted new rules for processing and appeal of health benefit claims under group health insurance policies. An explanation of the final rules can be found at: http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=25131&AgencyId=8&DocumentType=2
The ACA provides the following, in summary:
- If the insurer does not strictly adhere to all the regulation’s requirements, administrative appeals are deemed exhausted, allowing the claimant to proceed to federal court without pursuing further administrative remedies. Importantly, any review of the decision in any subsequent litigation will be de novo rather than under an arbitrary and capricious standard. 2 There is an exception for “minor compliance errors,” which will not result in deemed exhaustion if the error is: de minimus; non-prejudicial to the claimant; beyond the insurer’s control or is the result of good cause; was made as part of an ongoing, good faith exchange of information; and is not reflective of a pattern or practice of noncompliance. If the plan asserts an exception to the deemed exhaustion provision, the claimant has the right to request that the plan state in writing its basis for asserting that it is entitled to the exception.
- Plans must offer an external review process for denials. Fully insured and self-insured plans both must comply. Plans must use an available state external review process. The decision of the external review is binding on the plan. If no state external review is available, then plans can use the review process currently administered by HHS, or a Federal external review process supervised by the U.S. Departments of Labor and Treasury. After January 1, 2014, a state external review procedure can only be used if it complies with certain provisions of the National Association of Insurance Commissioners Uniform Model Act. Connecticut’s external review program, administered by the Insurance Department, complies with the requirement, so all plans should be using the state process after January 1, 2012. Self-insured plans not subject to a state review process or the HHS-supervised process have a safe harbor to comply with the external review requirement if they contracted with at least three independent review organizations and rotated claims among them by July 1, 2012.
- Response to an “urgent care claim” is still 72 hours, as under the prior regulations, but a plan cannot contest a physician’s determination that a claim is “urgent.”
- To reduce conflicts of interest, decisions on hiring, compensation, termination and promotion of plan administration employees cannot be based denying claims. For instance, a plan could not offer a bonus based on how many denials an administrator made.
- The denial letter must include the date of service, identify the health care provider, the claim amount, and any denial codes and their meaning. The letter must notify the claimant of the claimant’s right to request diagnosis and treatment codes and their meaning.
- The letter must describe any standard used to deny the claim, and how it was applied. For instance, if medical necessity is the basis for the denial, the notice must include a description of the medical necessity standard.
- The plan must describe the process for internal appeals and the external review process, including how to initiate an appeal.
- The plan must provide information on how to contact any consumer assistance program established under the Public Health Service Act to assist individuals with the claims process.
- A rescission of coverage, for reasons other than non-payment of premium, is an “adverse determination” that requires a denial letter in compliance with the regulations. Rescission of coverage occurs, for instance, when a plan claims a participant was not truthful in completing a medical certification.
- If more than 10% of the population in the claimant’s county of residence speaks the same non-English language, the plan must provide notices in a “culturally and linguistically appropriate” manner. There are no counties in Connecticut that would be included, so these materials do not describe this process in detail. If you have a case that might be subject to these requirements, a description of the process and the counties that are included are listed in DOL’s Final rule, the cite for which is above.
Most of these regulations only came into effect this year, and no cases construing the regulations have been decided yet. We therefore don’t know yet what the practical consequences of the new rules will be.
Certain healthcare plans that were in existence at the time the ACA was enacted are grandfathered and are exempt from certain ACA requirements, including having to provide external review of cost-free preventative care. If plans are grandfathered, they are supposed to disclose this in any plan materials. 75 Fed. Reg. 34538 (June 17, 2010). The requirements to maintain grandfathered status are strenuous, so if a plan asserts that it is grandfathered, you may want to research whether the plan still qualifies for grandfathered status under this regulation.
B. Enforcement of ACA Mandates Under ERISA
Section 1201 of the ACA amended ERISA make the ACA and its coverage mandates enforceable under ERISA. There is therefore a private right of action under ERISA to enforce the provisions of the ACA. Equitable relief under 502(a)(3) would be available if a plan did not comply with the coverage or notice provisions of the ACA. It is uncertain whether a suit could be brought under the breach of contract provision of ERISA (510(a)(1)(b) to obtain mandated benefits that were not actually provided under the plan documents. Some courts have suggested that the mandated coverage provisions of the ACA should be deemed incorporated into every plan, which would allow a suit for mandated benefits even if the plan did not provide for the benefits. N. Y. State Psychiatric Ass'n v. Unitedhealth Group, 2013 U.S. Dist. LEXIS 158438, 40 (S.D.N.Y. Oct. 31, 2013).
III. Second Circuit and Connecticut District Court Cases
A. Breach of Fiduciary Duty
ERISA fiduciaries have been regularly sued for breach of fiduciary duty when the value of employer stock or other investments held by the plan dropped, particularly during the recent financial crisis. ERISA was seen as a way to bring a case when a company’s stock declined that avoided the procedural roadblocks set up in securities fraud cases by the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, and the Federal Rules of Civil Procedure, which do not apply to ERISA claims.
Most circuits, including the Second Circuit, have made it difficult for such cases to survive the pleading stage. These circuits have applied a presumption of prudence, requiring that the plaintiff plead facts showing “imminent collapse” of the company, or “dire circumstances” to survive a motion to dismiss. The presumption is called “Moench Presumption” after the Third Circuit case of Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995) that first set it forth. In Gray v. Citigroup Inc. (In re Citigroup ERISA Litig.), 662 F.3d 128 (2d Cir. N.Y. 2011) and Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir. N.Y. 2011), the Second Circuit explicitly adopted the Moench presumption.
Rinehart v. Akers, 722 F.3d 137, 145 (2d Cir. N.Y. 2013). Applying Moench preemption to a suit against plan fiduciaries of the Lehman Brothers’ ESOP. The court found no duty to investigate material non-public information. The fact that the stock was “above-water” until shortly before the bankruptcy met the minimal duties of a plan intended to hold employer stock.
IV. Disability Benefit Claims
Ingravallo v. Hartford Life & Accident Ins. Co., 2014 U.S. App. LEXIS 7653, 10 (2d Cir. Apr. 24, 2014) The Second Circuit reversed the trial court’s grant of summary judgment to the plaintiff. The district court had identified three deficiencies in the s insurer’s decision in holding that it was arbitrary and capricious: the insurer did not adequately distinguish the social security decision; the reviewers ignored the “black holes” on the MRI of her spine; and while a surveillance video showed the plaintiff doing tasks inconsistent with the plaintiff’s claimed disability, it did not show that she could have performed her job.
The Second Circuit rejected each basis for the finding. It stated that the only evidence of the social security decision was the letter awarding benefits, and there was no explanation of the basis for the decision, so there was nothing for the insurer to respond to. The Court said the spots were noted, but sufficient medical evidence exists to provide an adequate basis for the decision aside from the issue of the black holes. As to the videos, the Court stated that the significance of the videos was that they prompted the insurer to perform a comprehensive evaluation rather than being the primary basis for the denial.
Miles v. Principal Life Ins. Co., 720 F.3d 472, 487 (2d Cir. N.Y. 2013). Arbitrary and capricious to deny benefits on grounds the claimant did not present objective evidence of his tinnitus, since there is no objective evidence of the condition: “we conclude that Principal did not give adequate attention to Miles's subjective complaints, as it failed to either assign any weight to them or to provide specific reasons for its decision to discount them . . . It must either assign some weight to the evidence or provide a reason for its decision not to do so..”
St. Onge v. Unum Life Ins. Co. of Am., 2014 U.S. App. LEXIS 4680, 5 (2d Cir. Conn. Mar. 13, 2014). In this case, the court affirmed the denial of benefits in a case involving subjective complaints of pain where there was a factual basis for rejecting them, such as that they were inconsistent with the claimant being able to drive, and were inconsistent with other medical records. Further, the insurer in this case had a functional capacity evaluation performed, which provided a further factual basis for rejecting the subjective complaints of pain.
Sobhani v. Butler Am., Inc., 2014 U.S. Dist. LEXIS 16462, 10 (D. Conn. Feb. 10, 2014) (Shea). The case illustrates the limited nature of discovery in ERISA benefits litigation. Judge Shea stated the standard for discovery as follows:
This Court has held that "a plaintiff seeking discovery outside the administrative record 'need not make a full good cause showing, but must show a reasonable chance that the requested discovery will satisfy the good cause requirement.'"
He found that the discovery that was not directed to potential conflicts of interests or irregularities in administration of the claim, and so was not permissible.
VI. Statutes of Limitation
ERISA does not contain a statute of limitations for ERISA 501(a)(1)(B) claims. Rather, the state contractual limitations periods apply. In Riley v. Metro. Life Ins. Co., 744 F.3d 241 (1st Cir. 2014), the First Circuit held that the limitations period for a claim of miscalculation of disability benefits accrues when the first miscalculated check is delivered, and does not begin again with each subsequent check.
Liberty Mut. Ins. Co. v. Donegan, 2014 U.S. App. LEXIS 2088, 2 (2d Cir. Vt. Feb. 4, 2014). Vermont law requiring all health plans, including self-insured plans, to report certain claims-handling data preempted by ERISA.
VIII. Plan Interpretation – Standards of Review
Participants in ERISA litigation are obsessed with standards of review: will the decision be reviewed de novo, or will the court defer to the plan’s interpretation of the plan. In the course of the litigation of the Frommert v. Conkright, 738 F.3d 522, 530 (2d Cir. N.Y. 2013) case, the district court deferred to the plan’s interpretation of the plan; the Second Circuit reversed on grounds there should not be deference; the Supreme Court reversed the Second Circuit, stating that there should be deference; on remand, the district court again deferred to the plan; and then the Second Circuit overturned the plan’s interpretation on grounds that even applying deferential review, the plan’s interpretation made no sense. It is clear that no matter what standard applied, the Second Circuit was not going to allow the plan’s decision to stand. The plan had interpreted the plan documents such that participants who had been reemployed by Xerox received a smaller pension benefit than new hires, which the Court stated was an irrational result.
Rau v. Hartford Life & Accident Ins. Co., 2013 U.S. Dist. LEXIS 67572, 17 (D. Conn. May 13, 2013) (Hall). Finding that evidence that the insurer’s employees did not derive any benefit from denying claims, and the employees’ statement that they did not take the cost to the insurer in to account when evaluating claims, largely mitigated the risk that the inherent conflict influenced the decision. Therefore, the inherent conflict of interest when the same entity pays and evaluates a claim did not alter the arbitrary and capricious standard of review under MetLife v. Glenn 554 U.S. 105 (2008).
XI. Attorney’s Fees
In Hardt v. Reliance Std. Life Ins. Co., 130 S. Ct. 2149 (2011) the court held that a party need not be a “prevailing party,” in the sense of obtaining an enforceable final judgment, to be entitled to legal fees under ERISA. In Carlson v. HSBC-North Am. (US) Ret. Income Plan, 542 Fed. Appx. 2, 8 (2d Cir. 2013), the Second Circuit applied the provision to order the district court to consider a fee award, even though the plaintiff’s complaint was dismissed in its entirety, as the plan had changed its administration of the plan in response to the lawsuit in a manner that gave the plaintiff most of the benefit she had sought, and benefitted other participants with pre-ERISA service credit.
1 For more information on these plans, go to this link: http://www.shrm.org/templatestools/hrqa/pages/whatisasubplan.aspx
2 ERISA benefit denials are reviewed under either an arbitrary and capricious standard of review that is deferential of the plan’s decision, or a de novo standard of review, in which the court acts as the claims administrator and does not defer to the plan’s decision.