Employer Law Report : Employment and Labor Relations Lawyer & Attorney : Porter Wright's Employer Law Report : Employment Litigation, Non-Compete, Trade Secrets

Then, the Court took a somewhat surprising next step. It found a "contractual gap" in the plan document regarding the cost of recovery. The Court found that the common-fund doctrine provided the best indication of the parties' intent, requiring the attorney's fees to be paid before the plan was reimbursed. The Court's majority thought it was unfair that plaintiff would have been "in the hole" for $866 if the common-fund doctrine had not been applied.

The $866 arose based on four agreements the plaintiff entered into: with the plan, attorney, and two other parties. Another view of the $866, from the other plan participants' perspectives, is that the $866 was not a hole, but was plaintiff's gamble that he could pay an attorney a 40% contingency fee on the entire recovery, and keep the approximately $66,000 remaining, rather than repaying anything to the plan.

In a dissent, Justice Scalia (joined by three other justices, including Chief Justice Roberts) agreed with the majority on the primary issues, but disagreed regarding the "contractual gap." In the dissent's view, the parties had conceded that the plan provided for full reimbursement, without any contribution to attorney's fees and expenses. Therefore, the issue of whether the plan was ambiguous as to attorney's fees was not before the Court, and the Court should not have applied the common-fund doctrine.

What does this decision mean for plan sponsors? U.S. Airways, Inc. v. McCutchen informs us that ERISA plan provisions prevail: health care plan sponsors can write provisions regarding reimbursement from recovery, and participants who accept payment of expenses under those conditions are expected to honor the agreement. The decision also leaves plan sponsors with a decision to make regarding whether to explicitly disclaim the common-fund doctrine in their plan documents. The Court's majority explained that where a plan rejects the common-fund doctrine, people like the plaintiff would make different judgments. Whether such a change in judgment is a bad thing, or a good thing, is something for plan sponsors to consider as they redesign their health care plans to comply with health care reform.
 

Gaglioti's Disability Discrimination Claims

As for Gaglioti's associational disability discrimination claims, the Sixth Circuit affirmed the trial court's grant of summary judgment and found that Gaglioti's could not meet his prima facie case because there was insufficient evidence that the termination occurred under circumstances that raised a reasonable inference that the disability of Gaglioti's wife was a determining factor in the decision.

Gaglioti argued that Levin Group terminated him because it wanted to cut insurance costs and his wife was a high-risk beneficiary. The court reviewed the line of cases dealing with the "expense" theory of association discrimination, which all require some showing that the potential medical expenses of the fired employee were on the minds of the decision maker at the time of the termination, and found no evidence to make this required showing beyond Gaglioti's self-serving assertions. The court affirmed the trial court's grant of summary judgment on Gaglioti's disability discrimination claim.

Takeaways: Gaglioti highlights the importance of employers to identify all reasons for terminating an employee at the beginning when the employer is getting ready to hand down the decision to the employee. If performance factors in as part of the reason, the employer's need to use this as evidence in any later litigation likely outweighs the employer's concern that it might bruise the employee's ego. It also likely outweighs the employer's attempt to be nice and keep performance issues out of the picture so the employee can easily collect unemployment. It also likely outweighs the employer's attempt to be nice and keep performance issues out of the picture so the employee can easily collect unemployment. At the bare minimum, the reasons given by the employer to the EEOC should mirror the reasons argued at summary judgment. So employers, getting your ducks in a row by the charge stage is imperative. If an employer does not, it can come across as if it is changing its reasons for terminating the employee, which do nothing but help the employee meet its pretext burden.

Lastly, know your policies, and make sure that those involved in the hiring and firing decisions do too. If you have a policy that defines "temporary" versus "full-time" employees as employees who do not receive benefits, don't give an employee benefits and try to later argue that the employee is temporary. With employers having mountain-size employee handbooks, this problem is not as uncommon as one would think.

Courts have relied on one of two rationales in justifying this fiduciary exception to the attorney-client privilege. Some courts have concluded that the exclusive benefit rule supersedes the fiduciary’s right to assert attorney-client privilege. Applying something of a balancing test, these courts have found that trustees’ fiduciary duty to furnish trust-related information to the beneficiaries outweighs their interest in the attorney-client privilege.

Other courts have reasoned that plan beneficiaries are the true “clients.” ERISA fiduciaries, on the other hand, are merely representatives of these beneficiaries. Because ERISA fiduciaries are not the actual clients, they do not enjoy the attorney-client privilege.

While a number of courts have embraced this fiduciary exception, most courts have recognized that the exception is not without its limits. For example, courts have found that the fiduciary exception does not apply to communications regarding non-fiduciary matters such as adopting, amending, or terminating an ERISA plan (i.e., communications regarding settlor functions) (see In re Long Island Lighting Co., 129 F.3d 268 (2d Cir. 1997)). Courts have also found that the fiduciary exception does not apply to a fiduciary’s communications with his attorney regarding the fiduciary’s personal defense in an action for breach of fiduciary duty (see United States v. Mett, 178 F.3d 1058, 1064 (9th Cir. 1999)).

In the context of ERISA litigation over a denied claim for severance benefits, one court distinguished between the application of the exception to communications made before a final claim determination versus communications made after a final determination (see Carr v. Anheuser-Busch Companies, Inc., No. 4:10-CV-1729 (E.D. Mo. June 3, 2011)). The Court found that the fiduciary exception applied to emails generated before the final claim determination because these communications related directly to how the plan administrator should interpret and conduct the appeal procedure rather than to future litigation strategy, the merits of the claim, or potential liability. Conversely, the Court found that the exception did not apply to emails generated after the final decision because, at that point, the interests of the claimant had become sufficiently adverse to the interests of the plan administrator.

While there are some limits to the fiduciary exception to the attorney-client privilege, the implications of this exception are significant. As illustrated in the Carr case, this issue often arises in the context of claims for benefits. The ERISA claims regulations might require plan administrators to provide certain communications to the participant. Further, if litigation follows, these communications might be part of the administrative record to be reviewed by the court, and/or the privilege may not apply. The purpose of the attorney-client privilege is to allow full and frank communication between client and attorney. The unfortunate result of the fiduciary exception to attorney-client privilege is that the typical best practice “document everything” might need to be thrown out the window in some situations. Plan administrators who are trying to do their jobs properly, without unnecessarily putting themselves at risk, need to carefully consider forms of communication and persons involved in addressing administration challenges. It may be best to wait to put anything in writing or email until after you consult one-on-one with your attorney and decide on a course of action.

Remember, sometimes a phone call is better than an email or a letter.

The District Court found that CIGNA was both the plan sponsor and plan administrator, and that its communications about the cash balance were incomplete, inaccurate, and intentionally misleading, causing a violation of the summary plan description requirements of ERISA Sections 102(a) and 104(b). For example, the Court found that summaries provided in 1998 did not describe "wear-away," a period during which some participants with significant traditional defined benefit accruals earned no new accruals under the cash balance plan, and suggested that wear-away would not occur. There is no explicit statutory penalty for violation of these ERISA sections, and the District Court ruled that ERISA Section 502(a)(1)(B) (benefits under the plan terms) allowed for reformation of plan terms in a manner consistent with the summaries, with benefits to be provided in accordance with those reformed terms. The District Court also held that the burden of proof the plaintiffs were required to meet to obtain this reformation was "likely harm", which allows for a presumption of prejudice if a plan participant can show they were likely to have been harmed as a result of the inconsistencies. The burden of proof then shifts to the employer to rebut the presumption of prejudice with evidence that the inconsistency was only a harmless error. The Second Circuit affirmed these decisions.

CIGNA argued that the employees should be held to a detrimental reliance standard, which would require each plaintiff to show that he or she read the summaries and that but for their reliance on the terms in those documents, they would have acted differently. The Supreme Court agreed to decide whether the District Court applied the correct legal standard for this 502(a)(1)(B) relief.

But the Supreme Court did not get to this issue, because it held that ERISA Section 502(a)(1)(B) does not authorize reformation. In the opinion written by Justice Breyer, the Court reminds us of the significant distinction between the plan sponsor function of establishing plan terms, and the plan administrator function of communicating to participants through the summary plan description and other materials. Rejecting the U.S. Department of Justice's position, the Court saw no reason to mix responsibilities by giving the plan administrator the power to set plan terms indirectly by including them in summaries, even if the plan sponsor and plan administrator were the same entity. The Court vacated the rulings, holding that summary documents about the plan do not constitute the terms of the plan, and that Section 502(a)(1)(B) does not authorize reformation of the plan document as written. These are significant rulings for employers, but not necessarily surprising ones.

The surprise is that the opinion did not stop with this holding. Instead, the Supreme Court remanded the case to the District Court for consideration of appropriate equitable relief under 502(a)(3), and traveled back in time several hundred years to analyze remedies that were typically available in equity prior to the merger of law and equity courts. This journey was to provide "principles that the court might apply on remand" because the District Court "strongly implied, but did not directly hold," that it would alternatively base its relief on this provision.

First, the Supreme Court stated that the power to reform contracts is a traditional power of an equity court, suggesting that 502(a)(3) might allow reformation of a plan for fraudulent suppressions, omissions or insertions. But as Justice Scalia, joined by Judge Thomas, points out in his opinion (concurring only as to the judgment) regarding the status of the summary plan description, reformation in this particular context does not square with the Court's analysis of the distinct roles of the plan sponsor and plan administrator.

Next, the Court stated that equitable estoppel based upon detrimental reliance was a traditional equitable remedy, which "operations to place the person entitled to its benefit in the same position he would have been in had the representation been true."

Finally, the Court stated that equity courts possessed the power to provide relief in the form of monetary compensation (a "surcharge") for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment. The Court decided that CIGNA is "analogous to a trustee" and settled on surcharge as its preferred remedy for a violation of summary plan description requirements.

Then the Supreme Court considered the "likely harm" standard, in the context of a 502(a)(3) breach of duty surcharge. The District Court had found (in the context of 501(a)(1)(B)): i) that the evidence presented had raised a presumption of likely harm suffered by members of the class; ii) that CIGNA, though free to offer contrary evidence in respect to some or all employees, had failed to rebut that presumption; and iii) the unrebutted showing was sufficient to warrant class-applicable relief.

The Supreme Court stated that under 502(a)(3), a fiduciary could be surcharged for breach of fiduciary duty upon a showing of actual harm, proven by a preponderance of the evidence, and causation. The Court then speculated about this case, without discussing case law on these 502(a)(3) issues, without distinguishing this Section 502(a)(3) breach of fiduciary duty claim from a Section 502(a)(2) breach of fiduciary duty claim, without defining the harm or the equitable relief, and without discussing how this actual harm and causation could be established in a class action.

Considerable dispute about Section 502(a)(3) has arisen since the Supreme Court's decisions in Mertens v. Hewitt Associates, Great-West Life & Annuity Ins. Co. v. Knudson, and Sereboff v. Mid Atlantic Medical Services, Inc., and conflicting opinions have been issued by various courts. Given that 502(a)(3) issues were not raised or briefed in this case, we believe Justice Scalia is correct in questioning why the Court engaged in this dicta, not binding upon the courts. Nevertheless, this case serves as a reminder to plan administrators that the requirement for a comprehensive summary plan description is a contradiction in terms with potential exposure.

Farhner then applied for "income-replacement benefits" from the United Transportation Union Discipline Income Protection Program ("DIPP"), an ERISA-based plan that permitted members to purchase coverage for any suspension or discharge, subject to certain restrictions. One of those restrictions was that the plan did not cover suspensions or discharges for insubordination. After reviewing the transcript of Farhner's hearing, the plan administrator denied benefits because Farhner had been discharged for insubordination. The plan based its decision only on the evidence that was obtained during KCSR's formal investigation. After exhausting his appeals under the plan procedures, Farhner filed suit with the federal district court challenging the denial of benefits on the ground that his discharge was really in retaliation for seeking FMLA leave.

The district court found that because the administrative record demonstrated that Farhner had been terminated for insubordination, which was a stated exclusion under the plan and therefore the plan's denial of benefits was not arbitrary and capricious. On appeal to the Sixth Circuit, Farhner argued that KCSR improperly terminated his employment in violation of the FMLA, that the plan administrator should have looked beyond the plain meaning of the DIPP to determine whether his termination was proper, that it failed to do so, and that its determination was therefore arbitrary and capricious. But the court held that the plan had no obligation to make an accurate determination of whether KCSR complied with its FMLA obligations. In addition, the court found that the plan administrator was not required to look beyond the language of the plan where that language was unambiguous and the plan did not require any inquiry beyond the evidence that was already available to it. The court also stated that while the administrator actually went beyond the plan language to review facts, that did not modify the plan terms or change the requirement to adhere to plan terms. Because the evidence before the plan supported the conclusion that Farhner had been insubordinate, the Sixth Circuit upheld the denial of benefits.

The concurring opinion agreed that the administrator's decision was not arbitrary and capricious, but argued that the administrator was not permitted to have "blindly relied on the employer's stated reasons for its actions." We believe that "blind reliance" is exactly what should happen with a well-written plan. Farhner could have chosen to file an FMLA complaint against his employer in addition to or rather than a claim for benefits from the plan. If a court found that KCSR had violated the FMLA, then that fact could have been brought before the plan administrator for its consideration.

Though ERISA-based income protection plans are relatively rare, this case still is instructive to employers since these issues arise in the context of many other plans, such as severance pay plans, disability plans, and life insurance plans. These plans should include language providing the plan with discretion to determine eligibility for benefits and to construe the plan's terms. This language in the DIPP was essential to ensuring that the court would only look to see whether the plan's determination as to Farhner's eligibility for benefits was "arbitrary and capricious." Without such language, the court will not give such a deferential standard of review. Second, this plan was designed to appropriately separate the employer's role of hiring and firing employees from the plan administrator's role of providing benefits. Redundant but even more helpful would have been a provision that stated the plan administrator was entitled to rely on the employer's records (including stated reason for termination) and was not required to question those records.

As another example, in pension plans that provide service credit for periods of disability, the pension plan might provide that the administrator will rely on the long-term disability insurance carrier's determination of the individual's status. This separation of duties keeps the parties in their proper roles and helps prevents conflicts of interest.

It is interesting that there is no information to suggest whether Farhner ever filed an FMLA complaint against KCSR in addition to this claim for benefits under the DIPP. Query whether the availability of such benefits prompted Farhner to follow this relatively low cost option as opposed to an actual FMLA complaint. If so, the results of this case may prompt other employers to consider whether their ERISA plans are tailored to help avoid more costly litigation.

The Xerox plan administrator had interpreted the offset provision of the plan to allow for a “phantom account method” for computing the offset. The district court granted summary judgment for the plan, but the Second Circuit held that this interpretation was unreasonable and proper notice was not provided, and remanded the case to the district court. There, the plan administrator proposed an alternative interpretation that accounted for the time value of money previously received by the employees. The district court declined to apply a deferential standard of review to the interpretation, and adopted a method that did not account for the time value of money. The Second Circuit held that the district court was not required to apply a deferential standard of review, and that the decision was not an abuse of discretion.

The Supreme Court disagreed, finding that this “one-strike-and-you’re-out” approach had no place in an ERISA matter. The plan administrator was entitled to a deferential standard of review, regardless of its prior error. Notably, the Supreme Court provided a reminder that ERISA represents a “careful balancing” between ensuring fair and prompt enforcement of rights under a plan, and the encouragement of the creation of such plans. Further, as the Supreme Court explained, the Second Circuit’s approach of ignoring the time value of money was “heresy” in the actuarial world. The plaintiffs’ own actuary even testified that recognition of the time value of money was required. Failing to recognize time value would cause a windfall for the plaintiffs, providing them with greater benefits than employees who never left the company, and draining plan assets at the potential expense of the other employees.

This case serves as a timely reminder to the courts, Congress, and Administration that employers are not required to maintain employee benefit plans, and benefit plan assets are limited. Careful balancing is needed to encourage employers to continue to adopt and maintain employee benefit plans.

Concerning the DOL announcement of the Ohio action, DOL has sued the former president of a Twinsburg company, alleging that he was a fiduciary, and that he failed to timely forward participant elective deferrals to a 401(k) plan on a timely. Who is a fiduciary and what is timely? Therein lies the risk for other plan sponsors and administrators. The DOL regulations set forth “facts-and-circumstances” definitions for both of these determinations. Our experience is that DOL is being very aggressive in applying these vague standards in an effort to force “voluntary” compliance and corrective contributions from plan sponsors and administrators.

Under the regulations, participant contributions become plan assets “as of the earliest date on which such contributions can reasonably be segregated from the employer’s general assets” but in no event later the fifteenth business day of the following month for 401(k) plans (or 90 days for welfare plans). In our experience, DOL believes that, ideally, participant contributions would be deposited in trust the same day as the payroll withholding. Reasonable is somewhere between ideal and maximum, but where? The regulations recognize that circumstances can vary significantly from employer to employer, and common sense suggests that circumstances can vary from payroll period to payroll period. Our experience is that DOL is typically not so flexible or understanding during an investigation. 

What does all of this mean? DOL plays an important role in protecting retirement benefit assets, but you should know that it is not just criminals and embezzlers who need to be concerned about DOL enforcement. Every employer that sponsors or administers a benefit plan with participant contributions should be concerned about this grey area. If you are responsible for remitting participant contributions to ERISA plans, we encourage you to review your practices with legal counsel. If you are notified of a DOL investigation, legal counsel is especially important to help you defend against a DOL assertion that the contributions are untimely. Finally, it is much better to identify and correct any delinquent contributions through an internal review before DOL shows up at your door.

The Sixth Circuit restated the familiar rule from its Yard-Man line of cases that although there is no presumption that negotiated benefits vest, there is an “inference” that “it is unlikely that [welfare benefits] would be ‘left to the contingencies of future negotiations’” so long as there is either explicit contractual language or, in the event of ambiguity, extrinsic evidence of an intent to vest healthcare benefits. The Sixth Circuit found that the language in this case was sufficient to vest the healthcare benefits and make it unlawful for CNH to terminate the benefits. 

The Sixth Circuit next acknowledged that if a summary plan description contained unqualified reservation-of-rights language, to the effect that the employer had a unilateral right to terminate coverage, and if the union failed to grieve or object to such language, then such reservation-of-rights language “prevent[s] retiree benefits from vesting” even if the summary plan description was distributed after the effective date of the CBA. But in this case, while the summary plan description stated that the employer had the unilateral right to terminate benefits, it also stated that the CBA language controlled in the event of a conflict. Accordingly, the employer was prevented from making any unilateral changes in benefits.
 

However, because the CBA was silent as to changes in benefit offerings and because benefit levels and offerings for retirees had changed from CBA to CBA, the Sixth Circuit held that CNH was permitted to make reasonable changes to these benefits. The Sixth Circuit remanded to the district court for findings on the extent to which the CBA allows for reasonable modifications to the scope of healthcare benefits for retirees.
 

In Schreiber v. Philips Display Components Co., No. 07-2440 (6th Cir. Sept. 2, 2009), the Sixth Circuit held that language in the CBA providing that retirees “are entitled to purchase health insurance coverage on the same terms and at the same employee contribution levels as in effect for active employees” and “group insurance in force upon the signature date of this Collective Bargaining Agreement shall remain in full force and effect until September 28, 2003” was ambiguous as to whether the retiree benefits were limited to the duration of the CBA. Therefore, the Sixth Circuit ordered the court to review the plan document and other extrinsic evidence regarding the intent of the parties as to whether the durational limit applied to the retiree benefits, or just to the CBA itself.
 

These decisions provide a reminder to employers that agreeing to less than precise language about retiree health benefits in a collective bargaining agreement may result in obligations long into the future. In addition, these cases raise interesting questions about the extent to which carefully designed plan documents and summary plan descriptions may establish the right to amend and terminate retiree health benefits, notwithstanding ambiguous collective bargaining agreement provisions.

What CBA language is sufficient in the Sixth Circuit to establish that vesting of retiree medical benefits was not intended? No one knows. Since the seminal case in the early 1980’s, the Sixth Circuit has yet to find that a CBA did not vest retiree medical benefits. In UAW v. Yard-Man, 716 F.3d 1476 (6th Cir. 1983), applying the Labor Management Relations Act (LMRA) and disregarding the ERISA presumption that retiree medical benefits are not vested, the Sixth Circuit announced a rule by which retiree benefits are “status” benefits carrying an inference that they continue so long as the prerequisite status is maintained. When benefits accrue upon achievement of retiree status, there is an inference that the parties likely inferred those benefits to continue while the beneficiary remains a retiree. Extrinsic evidence is then reviewed if the CBA is silent about the duration of benefits, or ambiguous as to whether benefits are vested. With an inference of vesting, almost any CBA can be deemed to vest or to at least be ambiguous, thus shifting the burden to the employer to establish that it did not vest benefits. In Yolton v. El Paso Tenn. Pipeline Co., 435 F.3d 571 (6th Cir. 2006), the Sixth Circuit stated that the court “has never inferred an intent to vest benefits in the absence of either explicit contractual language or extrinsic evidence indicating such an intent.” Yet, in Yolton and subsequent cases, the Sixth Circuit has continued to find an intent to vest based on language that is not persuasive in other circuits. The Sixth Circuit did offer a glimmer of hope to employers in finding that the inference of vested lifetime retiree medical benefits did not extend to active employees who remained employed after a CBA expired, regardless of whether they were eligible to commence pension benefits. Winnett v. Caterpillar, Inc., 553 F.3d 1000 (6th Cir. 2009).
 

At issue in Tackett was a 2000 CBA that stated, “[e]mployees who retire on or after January 1, 1996 . . . [among other points-based eligibility requirements] . . . will receive a full Company contribution towards the cost of [medical] benefits.” (Emphasis in opinion.) The same paragraph of the CBA also outlined reduced employer contributions for retirees lacking the full number of points required for full retirement and stated, “[e]mployees will be required to pay the balance of the healthcare contribution.” At the time the CBA was signed, the employer did not require retiree contributions for retiree medical benefits. Several years later, however, the employer announced that it would require retirees to contribute to the cost of their medical benefits. Following the announcement, the retirees sued under Section 301 of the LMRA and Sections 502(a)(2)(B) and (a)(3) of ERISA.
 

The employer moved to dismiss the LMRA and ERISA claims, arguing that, among other things, the quoted CBA language did not establish a vested right to medical benefits. The district court agreed with the employer and dismissed.
 

The Sixth Circuit reversed. In so doing, the Court restated the familiar rule that medical benefits, as opposed to pension benefits, do not automatically vest upon retirement, but that employers and employees are free to vest them by agreement. The employer in Tackett argued that the “full Company contribution” language merely meant that the retiree would receive the full amount of the Company’s potential contribution to medical benefits, emphasizing that the employee was still required to pay the balance of the medical contributions for support. The retirees argued that the “full Company contribution” language suggests that the CBA conferred vested medical benefits. 

The Court agreed with the retirees that their complaint presented a plausible claim that the parties intended to vest medical benefits. The Court reasoned that it is unlikely that a union would agree to language that ensures its members a “full Company contribution,” if the employer could unilaterally change the level of contribution. Thus, the Court found the employer’s interpretation implausible because it would give the employer full discretion to set any contribution—including no contribution at all—rendering the promise wholly illusory.
 

The Court also agreed with the retirees that the language requiring employees to pay the balance of contributions can reasonably be interpreted to modify only the language regarding employees with less than the number of seniority points required for full retirement benefits. Finally, the Court applied another tenet of the presumption in favor of vesting, finding that because the CBA tied eligibility for medical benefits to the receipt of pension benefits, the parties must have intended the medical benefits to vest upon retirement. Consequently, the Court held that, for purposes of both LMRA Section 301 and ERISA Section 501(a)(1)(B), the CBA language suggests an intent to vest the medical benefits sufficient to withstand a motion to dismiss.

Finally, the Court affirmed the dismissal of the plaintiffs’ breach of fiduciary duties claims. The Court held that ERISA Section 502(a)(2)(B) provided full relief to the plaintiffs for their claims for benefits, making Section 502(a)(3)’s residual or “catchall” equitable relief unnecessary where, as here, the plaintiffs merely “repackaged” their benefits claims as breach of fiduciary duty claims. In affirming this dismissal, the Court only considered the plaintiffs’ complaint and declined to consider extrinsic evidence offered in support of their claims.
 

While we recognize that the negotiation of collective bargaining agreements is an art in and of itself, this decision should remind employers that the text of such an agreement can bind them to employee benefit obligations they may never have intended, for many years into the future. In the Sixth Circuit, at least, precise text appears to be required to specify that retiree medical benefits are not vested, to sever retiree medical benefit eligibility from pension benefit eligibility, to preserve the right to reduce or eliminate employer contributions, and to preserve the right to amend or terminate the retiree medical plan.
 

But the Tackett case is not all bad news for employers—the Court’s refusal to consider extrinsic evidence supporting the Section 502(a)(3) claim for benefits suggests that plaintiffs may actually have to specifically plead their claims rather than relying on affidavits and other “evidence” to avoid a motion to dismiss on scantly-pled allegations.

The U.S. Court of Appeals for the Sixth Circuit affirmed. The Sixth Circuit held that a plant closure is actionable under Section 510 only when interfering with employees’ attainment of ERISA benefits is a “motivating factor” in the decision, as opposed to a mere “incidental” factor. Further, it held that there is no requirement under ERISA to transfer or recall employees near their vesting date for ERISA benefits. The Court declined, however, to create a rule that ERISA claims can never arise from plant closure decisions. In contrast, the Court explained that employees asserting such claims must show that the proffered business justification underlying the decision was “incredible or phony,” a difficult showing to make. 

In its analysis, the Sixth Circuit found that the employees made a threshold showing that the employer was, at least in part, motivated in its plant closure decision by a desire to reduce labor costs, which necessarily included the cost of retirement benefits. The Court also found that the employer articulated a legitimate, non-discriminatory reason for the plant closure by asserting that the Van Dyke facility was only 10 percent utilized. As a counter to TRW’s evidence, the employees introduced evidence that the Van Dyke facility was poorly run and that cost cuts could have saved the facility from closure. The Court, however, found that this evidence was insufficient as a matter of law to show that the overcapacity justification was a pretext to prevent pension vesting. In so holding, the Court found it critical that although the employees argued that the employer shut down the Van Dyke facility with employees close to obtaining the 30-year service mark, most of the employees needed more than five additional years of service to reach that mark. Only seven were within two years of attaining the mark, and two of the seven later reached the 30-year mark after being recalled on the basis of seniority under the collective bargaining agreement. The Sixth Circuit then suggested that employees must show that the employer “targeted” certain benefits or rights for interference to avoid dismissal. 

Further, the Court found nothing in ERISA Section 510, the collective bargaining agreement, or the pension plan terms that would support the employees’ contention that the employer was required to recall many of them back or transfer them to the Mancini facility. Rather, the ultimate inquiry hinged on whether the plant closure and resulting discharges were lawful, which the Court determined they were.

This Sixth Circuit decision provides employers with a timely reminder during difficult economic times.  TRW reminds employers considering plant closings or other discharges that where pension costs are involved that it may be fairly easy for discharged employees to establish a presumption of ERISA discrimination. Hence, during the planning stages, it is essential that an employer consider whether it will be able to produce evidence supporting a legitimate, non-discriminatory reason for the discharges. 

Distressed primarily by the fee levels, the participants brought suit. The participants claimed that Deere breached its fiduciary duties by failing to disclose the revenue sharing arrangement. They further alleged that both Fidelity companies were “functional fiduciaries” of the plan. Finally, they claimed that Deere and the Fidelity companies breached fiduciary duties by selecting funds with excessively high fees. The participants’ claims were dismissed by the trial court for failure to state a claim, and the participants appealed.

Fidelity’s Alleged Status as a Fiduciary.

The Seventh Circuit affirmed the district court’s dismissal. The Court reasoned that merely discussing the offerings with Deere did not cause the Fidelity entities to have sufficient control over the selection of funds as to confer “functional” fiduciary status. The Court characterized Fidelity’s role as that of furnishing professional advice, much like a lawyer or accountant. The Court found that Fidelity merely “played a role” in the process; it did not have the “final authority” over investment fund offerings necessary to establish a fiduciary role.

Claims Against Deere for Failing to Disclose Revenue-Sharing and for Limiting Investment Offerings to Fidelity Funds.

The Court similarly rejected the fiduciary duty claims against Deere. Deere did not breach its fiduciary duty by failing to inform participants that Fidelity Trust received a portion of the fees collected by Fidelity Research. The Court found that ERISA did not require disclosure of revenue sharing. “While Deere may not have been behaving admirably by creating the impression that it was generously subsidizing its employees’ investments by paying something to Fidelity Trust when it was doing no such thing,” there was no allegation of a fraudulent statement of a dollar amount. The Court held that it was sufficient for Deere to disclose the total fees for the funds and direct the participants to the prospectuses for information about fund-level expenses. The Court explained that the participants submitted evidence that Deere believed that Fidelity Trust’s services were free, and the decision may have been different if Deere had intentionally misled its employees.

The Court also quickly dismissed the participants’ other claim —that Deere imprudently agreed to limit the investment options to Fidelity Research funds and therefore offered only investment options with excessive fees. The Court held that Deere provided for a wide range of expense ratios and levels of risk in the investment offerings, and that it was of no consequence that the majority of these investments were Fidelity fund investments. (While there are pros and cons to allowing individual brokerage accounts in a retirement plan, in this case, the existence of those alternatives was helpful to Deere because it allowed participants to choose investments with lower fees.) The Court noted, however, “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund” and that “if particular participants los[e] money or d[o] not earn as much as they would have liked, that disappointing outcome [is] attributable to their individual choices” rather than the actions of the fiduciary.

The Court also assumed, without deciding, that the ERISA Section 404(c) safe harbor applied to the selection of investment options. This safe harbor allows plan fiduciaries who permit participants to direct their own investments to be shielded from fiduciary liability for the decisions of the participants. The Court saw no plausible argument in the complaint that Deere had failed to comply with the requirements of Section 404(c).

What This Decision Means for Employers.

While the decision in Hecker v. Deere & Co favors employers, this case spotlights a hot topic, 401(k) plan fees, that requires ongoing employer attention. Employers need to consider their fiduciary responsibilities with respect to retirement plan investments, and take steps to minimize litigation exposure.

An employer that is allowing participants to direct investments needs to carefully assess the investment options it is providing, and the disclosure of fees and other pertinent information. As discussed in Hecker, in response to complaints regarding fee disclosure, the Department of Labor has proposed extensive fee disclosure regulations. Final regulations were anticipated to be effective January 1, 2009, but are on hold under the new Presidential administration. Employers will need to comply with these new regulations when they are finalized and become effective, and may also be subject to additional legislation that has been proposed. Further, maintaining a program for compliance with the safe harbor provisions of ERISA Section 404(c) will help protect fiduciaries from liability for the participants’ own choices.

The Glenn court extended that analysis to an insurance company that administers a claim and also funds the benefit. In determining that a conflict of interest exists when an insurance company acts as plan administrator, the court explored several bases for that conflict. First, it found that an employer’s conflict of interest may extend to its selection of an insurance company to administer its plan. That is, it may choose to purchase insurance based on low rates as opposed to a company’s accurate claims processing. 

Second, the court noted that ERISA imposes “higher-than-marketplace quality standards” on insurers, which requires it to “discharge its duties in respect to discretionary claims processing solely in the interests of the participants and beneficiaries of the plan”; requires it to provide a full and fair review of claims denials; and subjects its individual claim decisions to judicial review.

Third, the court concluded that it is reasonable to treat employers and insurers alike in deciding whether a conflict exists because the district courts may still consider the differences between an employer and an insurance company when determining the significance or the severity of the conflict on each individual case. 

Addressing the second question, the court rejected claimants’ invitation to “bring about near universal review by judges de novo—i.e., without deference—of the lion’s share of ERISA plan claims denials” and to create “special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payer conflict.” The court reiterated its earlier decision in Firestone that a conflict of interest must “be weighed as a factor in determining whether there is an abuse of discretion.” It does not change the standard of review from one of deference to de novo. Rather, it means that “when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is just one.” 

The court highlighted both trust and administrative law that frequently “ask judges to determine lawfulness by taking account of several different, often case-specific, factors, reaching a result by weighing all together,” and that in such instances, “any one factor will act as a tiebreaker when the other factors are closely balanced.” The court distinguished those “cases where an insurance company administrator has a history of biased claims administration” and from those “where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.” 

While the court only provided examples relating to insurance-company administrators, it did not limit its elucidation of Firestone’s conflict-of-interest factor test to those instances when the plan administrator is an insurance company. In other words, Glenn suggests that these considerations must be taken into account when district courts evaluate a conflict of interest whether the claims decision is made by an employer who pays the benefit or by an insurer who pays the benefit.

What is significant abut Glenn is what the Court did not do. It did not change the standard of review where the plan grants the administrator discretion; it did not create “special burden-of-proof rules, or other special procedural or evidentiary rules” for the claims review process where this conflict exists; and it did not find that the mere existence of this conflict was sufficient to throw open the doors to discovery in a benefit claim review. 

So what does Glenn mean for employers? First, employers should anticipate that plaintiffs in benefits litigation may argue for more discovery based on an alleged conflict, even though discovery was not at issue in Glenn and the Court did not suggest that established precedent for limited discovery should be displaced. Second, while Glenn involved an insured benefit, an employer that self-insures a benefit plan may also want to consider establishing and documenting “active steps to reduce potential bias and to promote accuracy” of claims decisions.