U.S. Supreme Court Allows 502(a)(2) Action for Fiduciary Breach to Recover Losses to Participant's Portion of 401(k) Plan. A participant brought suit to recover losses to his 401(k) plan due to the employer’s failure to implement his investment directives. Contrasting the action with Russell, the U.S. Supreme Court observed that the misconduct alleged relates “to the proper management, administration, and investment of fund assets, with an eye toward ensuring that the benefits authorized by the plan are ultimately paid to participants and beneficiaries” whereas the plaintiff in Russell “received all of the benefits to which she was contractually entitled, but sought consequential damages arising from a delay in the processing of her claim.” Noting that the landscape in pension plans has changed from defined-benefit to defined-contribution plans, the Court went on to explain that “fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive. Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of Section 409. Consequently, our references to the ‘entire plan’ in Russell, which accurately reflect the operation of Section 409 in the defined benefit context, are beside the point in the defined contribution context.” Hence, “although Section 502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account.” See LaRue v. DeWolff Boberg & Associates, No.06-856, 2008 WL 440748 (Feb. 20, 2008).

Sixth Circuit Holds that Participants in Defined Contribution Plan Have Standing to Sue under Section 502(a)(2) for Losses to the Plan. "While ERISA may have reflected Congress's attempt to define available remedies, the overarching goal of the statute was to ensure that such relief was available in cases of fiduciary breaches.... As the United States' brief in support of the plaintiff in Larue states, a decision denying standing could negatively-and unjustifiably-impact plan selections involving more than $3.3 trillion in retirement assets by preventing the Secretary of Labor, or another eligible plaintiff, from recovering losses if the breach primarily affected a single account." Further, the cout found the result compelled by the plain language of the statute. "A fiduciary's liability is not limited to plan losses that will ultimately redound to the benefit of all participants. Nor does the statute indicate that suit must be brought by a 'sub-class' of participants or as a class action.... The District Court concluded that a loss 'to the plan' meant that the plaintiffs had to seek compensation in a representative capacity for the entire plan. We are unable to think of any reason why the ability to sue to recover losses should turn on the number of plan participants allegedly affected by the breach; whether one, ten or 1,000 participants are affected, the loss occurs to the plan. Indeed, although the number of affected participants differs, the nature of the relief - the payment of money to the plan - is the same regardless of the number of participants to whom the recovered assets are allocated. If the plaintiffs are successful in their case, any assets recovered from the defendant would first be paid into the plans then allocated to their individual accounts, and ultimately paid to them in the form of benefits." Tullis v. UMB Bank, No.06-4632, 2008 WL 215535 (6th Cir. Jan. 28, 2008).

The Sixth Circuit Allows Participant of Now-Defunct Plan to Sue under Section 502(a)(2). The U.S. Sixth Circuit Court of Appeals noted that the goals of ERISA "would be significantly frustrated if a breaching fiduciary could escape liability merely by terminating a plan before a lawsuit is commenced or during its pendency." Defendants argued that the participants suing under 502(a)(2) on behalf of a defunct plan because there is no "plan" to receive benefits if the plaintiffs are successful, making any relief granted personal, rather than derivative. "The remedy proposed by plaintiffs and supported by the Secretary of Labor, however - the appointment of an independent fiduciary to hold any amounts recovered from defendants in trust - would ensure that all recovery went to the Plan and not to plaintiffs." The court further found that genuine issues of material fact regarding the materiality of the misrepresentations, the fiduciary status of the defendants, and the characterization of the contributions precluded summary judgment. See Pfahler v. National Latex Products Company, No.06-3677, 2007 WL 4395155 (6th Cir. Dec. 14, 2007).

Fifth Circuit Attempts to Square Sereboff with Great-West and Rejects Distinction Between Recovery from Fiduciaries and Non-Fiduciaries in Defining Appropriate Equitable Relief. In a case brought by a surviving beneficiary whose deceased spouse had been erroneously advised by his employer that he would be, and was, fully covered, upon switching to a new group life policy, the U.S. Fifth Circuit Court of Appeal reconciles Sereboff with Great-West as "confirming" that "the sine qua non of restitutionary recovery available under §502(a)(3) is a defendant's possession of the disputed res." The Court then rejected the argument that, as under traditional principles of equity, relief from a breaching fiduciary is broader under ERISA than the relief available from a non-fiduciary. "There is no textual argument for drawing this distinction under §502(a)(3). Only the nature of the claim and the relief sought-not the status of the litigants-determine the scope of available §502(a)(3) recovery." A defendant's possession of the disputed res, the court continued, is "central to the notion of a restitutionary remedy, which was conceived not to assuage a plaintiff's loss, but to eliminate a defendant's gain." Because the employer never maintained possession of plaintiff's insurance proceeds, the court denied equitable restitution in the form of a constructive trust or equitable lien. See Amschwand v. Sperion Corp., No.06-20346, 2007 WL 3027072 (5th Cir. Oct. 18, 2007).

U.S. Magistrate Orders Employer to Produce Plan E-Data in Third Party’s Possession. Plan participants sought production of electronic pension plan records from the defendant employer, who maintained it could not produce the data because it was in the possession of a third-party plan record-keeper. Magistrate Hegarty, sitting in teh District of Colorado, held that the data was in the defendant’s possession, custody or control within the meaning of Rule 26 and ordered production. "When an employer chooses to use electronic means by which to maintain and retain the records required pursuant to ERISA §209" the court found, "the employer has the duty to ensure that the standards advanced in §2520.107-1(b) are met." See Tomlinson v. El Paso Corp., No.04-02686, 2007 WL 2521806 (D.Colo. Aug. 31, 2007).

U.S. Supreme Court Denies Review of Glanton Decision, Rejecting Article III Standing in 502(a)(2) Context. See Glanton v. AdvancePCS, 465 F.3d 1123 (9th Cir. 2006), cert. denied, No.06-1608 (Oct. 1, 2007) [discussed below].

Tenth Circuit Employs Contra Proferentem to Construe Ambiguities Against Insurer where Review is De Novo. See Miller v. Monumental Life, No. 05-2247, 2007 WL 2774252 (10th Cir. Sept. 25, 2007).

Sixth Circuit Rejects Participant Standing Under Section 502(a)(2) for Article III Purposes, But Confirms Standing under Section 502(a)(3) for Injunctive and Equitable Relief. In suit by plan participants for breach of fiduciary duty, the injury-in-fact requirement under Article III was not met in the context of claims on behalf of the Plan as a whole under Section 502(a)(2). The court found, in this regard, that: "Even having determined that Plaintiffs were each part of one ERISA plan, individual injury would only be possible if Plaintiffs paid percentage contributions instead of the usual flat-rate co-payment or deductible, and this assumes that Ford and Axle would pass on any increase in reimbursements or administrative fees that may have resulted from BCBSM's alleged wrongful negotiations," which, in the Court's opinion, was not sufficiently particularized nor concrete. However, "Plaintiffs need not demonstrate individualized injury to proceed with their claims for injunctive relief under 29 U.S.C. 1132(a)(3). Plaintiffs have sufficiently alleged that BCBSM caused the injury they complain of in this case-specifically, breach of fiduciary duty by negotiating more favorable rates for BCN at the expense of the Ford and Axle plans administered by BCBSM. Finally, because we have determined that Ford and Axle sponsor single ERISA plans, any restitution of ill-gotten gains and other equitable relief available under 1132(a)(3) would be distributed to the single ERISA plans in which Plaintiffs participate." See Loren v. Blue Cross, No. 06-2090, 2007 WL 2726704 (6th Cir. Sept. 20, 2007).

Third Circuit Rejects Requirement of “Proportionality” in Court-Awarded Fees. The U.S. Third Circuit Court of Appeal found that: “Rejecting a proportionality rule with regard to §1132(g)(2)(D) is consistent with the purpose of the provision. ERISA provides for ‘appropriate remedies, sanctions, and ready access to the Federal courts’ in order to ‘protect interests of participants in employee benefit plans and their beneficiaries.’ When delinquencies are small, the cost of recovery may be disproportionate, and requiring proportionality would, in effect, discourage plans from taking their claims to federal courts.” See United Auto Workers v. Metro Auto Center, No.05-4974, 2007 WL 2472237 (3d Cir. Sept. 4, 2007).

Seventh Circuit Clarifies the Meaning of De Novo Review. Reversing the district court's ruling in favor of the defendant insurer on cross-motions for summary judgment in a long-term disability case, the U.S. Seventh Circuit Court of Appeals made it clear that a District Court is not "reviewing" the conclusions of the plan administrator. “Some of the confusion in this area may be attributable to the common phrase ‘de novo review’ used in connection with ERISA cases. In fact, in these cases the district courts are not reviewing anything; they are making an independent decision about the employee’s entitlement to benefits. In the administrative arena, the court normally will be required to defer to the agency's findings of fact; when de novo consideration is appropriate in an ERISA case, in contrast, the court can and must come to an independent decision on both the legal and factual issues that form the basis of the claim. What happened before the Plan administrator or ERISA fiduciary is irrelevant.” See Diaz v. Prudential, No.06-3822, 2007 WL 2389773 (7th Cir. Aug. 23, 2007).

Fourth Circuit Affirms Decision in Favor of U.S. Air Officers and Directors in Breach of Fiduciary Duty Case. Airline employees brought class action against the company alleging breach of fiduciary duty by retaining airline stock as a 401(k) plan investment option and seeking recovery after stock was cancelled without distribution when the airline filed for Bankruptcy. The U.S. Fourth Circuit Court of Appeal affirmed the trial court’s refusal to admit a mathematical model proffered by plaintiff’s expert (which apparently predicted a high probability of imminent bankruptcy) which was “not generally relied upon by fiduciaries determining the bankruptcy risk of an investment in an individual security.” With respect to the breach of loyalty claims, the court noted that there is no per se prohibition where an officer, employee, agent or other representative of the plan sponsor also serves as a plan fiduciary, even if that fiduciary purchases company securities on behalf of that plan, and found no other indicators of a breach of loyalty - e.g. "that high-ranking company officials sold company stock while using the Company Fund to purchase more shares, or that the Company Fund was being used for the purpose of propping up the stock price in the market.” Rejecting claims of imprudence, the court noted that the company offered twelve diversified and less risky alternatives for investment, allowed participants to transfer freely, warned participants of the risks in plan documents, and sought and obtained two outside legal opinions regarding the continuation of company stock as an investment option. See DiFelice v. U.S. Airways, No.06-1892, 2007 WL 2192896 (4th Cir. Aug. 1, 2007).

Supreme Court Rejects Fiduciary Duty in Sponsor’s Decision to Terminate Plan Through Purchase of Annuity As Opposed to Merger with Multi-Employer Plan. Where union and plan participants challenged sponsor’s failure to appropriately consider a proposal to merge it’s defined benefit plan into a Taft-Hartley plan, the U.S. Supreme Court concluded that no fiduciary duty attached, as the merger of one plan into another was not a valid way under ERISA to “terminate” a plan. “The idea” the Court said, “that the decision whether to merge could switch from a settlor to a fiduciary function depending upon the context in which the merger proposal is raised is an odd one. But once it is realized that a merger is simply a transfer of assets and liabilities, PACE’s argument becomes somewhat more plausible: The purchase of an annuity is akin to a transfer of assets and liabilities (to an insurance company), and if Crown was subject to fiduciary duties in selecting an annuity provider, why could it automatically disregard PIUMPF simply because PIUMPF happened to be a multiemployer plan rather than an insurer?” However, “terminating a plan through purchase of annuities (like terminating through distribution of lump-sum payments) formally severs the applicability of ERISA to plan assets and employer obligations. Merger is fundamentally different: it represents a continuation rather than a cessation of the ERISA regime.” Also, the Court notes, “in a standard termination ERISA allows the employer to (under certain circumstances) recoup surplus funds, as Crown sought to do here. But ERISA forbids employers to obtain a reversion in the absence of a termination.... Crown could not simply extract the $5 million surplus from its plans, nor could it have done so once those assets had transferred to PIUMPF. This would have run up against ERISA’s anti-inurement provision, which prohibits employers from misappropriating plan assets for their own benefit.” See Beck v. PACE, 127 S.Ct. 2310 (2007).

Sixth Circuit Rejects Plan Administrator's Attempt to Change Basis for Denial of Benefits. In plaintiff's claim for disability benefits, the insurance company changed its basis for denial after an administrative appeal. While reviewing the denial of benefits under the arbitrary and capricious standard, the court of appeal reviewed de novo the legal question of whether the defendant complied with the notice requirements of ERISA. "Assuming arguendo that Sun Life complied with ERISA §503(1), it violated §503(2) by failing to 'afford a reasonable opportunity to plaintiff for a full and fair review by the appropriate named fiduciary of the decision denying the claim.' Such language cannot encompass Sun Life telling Wenner it was denying his claim for one reason, and then turning around and terminating his benefits for an entirely different and theretofore unmentioned reason, without affording him the opportunity to respond to the second, determinative reason for the termination." While a procedural violation does not necessarily require a substantive remedy - where, for example, there are two independent bases for denial, only one of which is procedurally deficient - "under these circumstances, it is appropriate to reinstate all benefits beginning from the invalid termination.... When an initial grant of benefits has been terminated in violation of §503, the benefits have 'never been properly revoked. Thus the procedural violation is not the reason that the benefits commenced, but it is the reason that they should continue until a decision regarding the potential revocation of ... benefits has been properly determined in compliance with the plan's provisions.'" See Wenner v. Sun Life, 482 F.3d 878 (6th Cir. 2007).

Divided Tenth Circuit Panel Concludes that Third-Party's Benefits Determination is Entitled to Deference. Plaintiffs were beneficiaries of the United Staffing Medical Plan. The relevant plan documents contained the Firestone language, naming United Staffing as the Plan Administrator and Named Fiduicary, but identifying an independent third party, Everest Administrator, as responsible for the review of claims. Both United and Everest were sued for denial of benefits and breach of fiduciary duty. Applying a de novo standard, benefits were awarded by the district court. On appeal, the Tenth Circuit, citing traditional trust principles, noted that "a fiduciary's decision to delegate does not violate his responsibility to the trust beneficiary insofar as the fiduciary himself remains personally liable for any decisions taken on his behalf." Hence, "once a health plan administrator has been delegated discretionary authority under the terms of the ERISA plan, nothing prevents that administrator from then delegating portions of its discretionary authority to non-fiduciary third parties.... United Staffing's decision to delegate limited authority to Everest Administrators according to the terms of the controlling Plan instrument.... does not constitute a failure of fiduciary judgment sufficient to warrant de novo review." The Court further held that Everest could not be held liable under 29 U.S.C. 1132(d)(2), and the matter was remanded for review, under the arbitrary and capricious standard, of the denial of benefits claim. Judge Holloway, dissenting, found the majority's decision "critically flawed because its underpinning is the unsupported assumption that 'discretion was exercised by some combination of the fiduciary and its agent.' Any suggestion that the agent exercised discretion is not supported by the evidence concerning how the claims were handled and is directly contrary to the contractual provision governing the relationship between the fiduciary and the agent. Further, both the fiduciary and the agent specifically denied in their pleadings, under constraints of Fed. R. Civ. P. 11, that the agent exercised any discretion. And the record is clear that the fiduciary, United, did nothing at all. Consequently, the majority's naked assertion that some combination of the fiduciary and its agent exercised discretion is simply that - a naked assertion completely lacking in support." See Geddes v. United Staffing Alliance Medical Plan, 469 F.3d 919 (10th Cir. 2006).

District Court Finds that Claims Against Insurance Broker for Failure to Procure ERISA-Compliant Bonds is Not Preempted. The plaintiff, a joint labor-management trust fund established and governed by ERISA, retained defendant, an insurance brokerage company, to acquire on its behalf an ERISA compliant bond. The policy procured by defendant, however, did not comply with ERISA's coverage requirements because it excluded independent contractors. While the bond was in force, an independent contractor had engaged in fraudulent investment schemes. Plaintiff brings this action asserting claims under Colorado Consumer Protection Act, breach of contract and negligence theories. A District Court sitting in the District of Colorado rejected defendant's argument that the claims fall into the category of "'misconduct growing out of the administration of the ERISA plan....' Although the background facts include misconduct in the administration of the plan, the primary issues to be litigated relate to the scope of Defendant's duty to procure insurance that satisfied the requirements of the insured and whether Defendant breached that duty. This duty arises primarily out of agency or contract and would exist even if the plan were not governed by ERISA." See Colo. Operating Engineers Health & Welfare Fund v. Clarke & Sampson, Inc., No. 04-2625, 2006 WL 3842107 (D.Colo. Dec. 27, 2006).

Ninth Circuit Panel Rules that Article III Prevents Participants and Beneficiaries from Suing for Relief on Behalf of their Plans under ERISA Section 502(a)(2) and/or (a)(3). Health plan participants sued their Pharmacy Benefits Manager (or "PBM"), AdvancePCS, for converting hidden rebates and other drug payments under Section 502(a)(2), and alternatively (a)(3), of ERISA. After the Harley decision came down from the Eighth Circuit, the defendant moved to dismiss on Article III grounds. The district court, in a somewhat cryptic decision, seemed to suggest that a participant did not have statutory standing to sue a "functional" fiduciary. On appeal, the Ninth Circuit Panel found that AdvancePCS easily fit the definition of an ERISA fiduciary, and therefore could be sued by a participant under the statute. The Court then, however, without even addressing ERISA's anti-inurement provisions, found no Article III standing on the issue of redress. Without explaining who exactly could satisfy the Lujan test in this situation, the Court then rejected the principle of "representational standing". Finally, the Court, without even addressing the Amicus Brief submitted by the U.S. Department of Labor, summarily dismissed, in a footnote, any and all claims for additional or alternative relief under Section 502(a)(3). See Glanton v. AdvancePCS, 465 F.3d 1123 (9th Cir. 2006), cert. denied, No.06-1608 (Oct. 1, 2007). [NOTE: Steve Herman argued (and lost) (so far) the case for Mr. Glanton and Ms. Mackner on behalf of thier respective health plans before the Ninth Circuit. Both the panel's decision and the Plaintiffs/Appellants' Petition for Rehearing En Banc is posted to the left, on this page.] [See also Note re: Moeckel v. Caremark (reaching a contrary result) below, regarding the involvement of Herman Mathis in PBM Litigation.]

Supreme Court Effectively Overrules Great-West. Without formally overruling the Great-West v. Knudson decision, the U.S. Supreme Court held that a plan fiduciary could seek subrogation under Section 502(a)(3). Relying on a 1914 decision, the court found that the claim was "equitable" because "the 'Acts of Third Parties' provision in the Sereboffs' plan specifically identified a particular fund, distinct from the Sereboffs' general assets - 'all recoveries from a third party (whether by lawsuit, settlement, or otherwise) - and a particular share of that fund to which Mid Atlantic was entitled - 'that portion of the total recovery which is due Mid Atlantic for benefits paid.' Like Street and Alexander in Barnes, therefore, Mid Atlantic could rely on a 'familiar rule of equity' to collect for the medical bills it had paid on the Sereboffs' behalf." Because the fiduciaries in this case sought an equitable lien "by agreement" as opposed to "equitable restitution" (as was sought in Great-West), satisfaction of the tracing rules outlined in the Great-West decision was not required. See Sereboff v. Mid Atlantic, 126 S.Ct. 1869 (2006).

Fourth Circuit Rejects Breach of Fiduciary Duty Claim For Mismanagement of 401(k) Plan. The plaintiff, James LaRue, was a participant in a 401(k) plan, and alleges that, in 2001 and 2002, he directed DeWolff to make certain changes to the investments in his plan account, but that these directions were never carried out. Rejecting his 502(a)(2) claims, the U.S. Fourth Circuit Court of Appeals found it difficult to characterize the remedy as anything other than personal. “He desires recovery to be paid into his plan account, an instrument that exists specifically for his benefit. The measure of that recovery is a loss suffered by him alone.” Then rejecting his claim for equitable restitution under 502(a)(3), the court observed that “Plaintiff does not allege that funds owed to him are in defendants’ possession, but instead that these funds never materialized at all. He therefore gauges his recovery not by the value of defendants’ nonexistent gain, but by the value of his own loss – a measure that is traditionally legal, not equitable.” LaRue v. Dewolff, Boberg & Associates, 450 F.3d 570 (4th Cir. 2006).

Supreme Court Holds That Claims for Payment of Workers' Compensation Premiums Do Not Receive Priority Under the U.S. Bankruptcy Code. Concluding that workers compensation premiums do not constitute unpaid contributions to an “employee benefit plan” under Section 507(a)(5) of the Bankruptcy Code, the Court rejected an argument that the definition of “welfare benefit plan” should be borrowed from the general definition used in ERISA. Noting that ERISA specifically exempts application to workers’ compensation plans, the Court based its decision on the general nature of workers’ compensation, reasoning that “statutorily prescribed workers’ compensation regimes do not run exclusively to the employees’ benefit. In this regard, they differ from privately ordered, employer-funded pension and welfare plans that, together with wages, remunerate employees for services rendered. Employers, too, gain from workers’ compensation prescriptions. In exchange for no-fault liability, employers gain immunity from tort actions that might yield damages many times higher than awards payable under workers’ compensation schedules. Although the question is close, we conclude that premiums paid for workers’ compensation insurance are more appropriately bracketed with premiums paid for other liability insurance, e.g., motor vehicle, fire, or theft insurance, than with contributions made to secure employee retirement, health, and disability benefits.” Howard Delivery Service v. Zurich American Ins. Co., 126 S.Ct. 2105 (2006).

Third Circuit Reverses Denial of Long-Term Disability Benefits as Arbitrary and Capricious in the Absence of Specific Findings by the Administrator. In a claim for LTD benefits against an insurance company, the court reversed the denial of benefits as “arbitrary and capricious” where specific findings were lacking as to the essential question of disability. The court found that: “The irreducible logical core of such a finding, [i.e., that the plaintiff was capable of performing alternate occupations], is that a claimant has a residual functional capacity that equals or exceeds the functional requirements of a feasible alternate occupation. These two determinations - the claimant’s capacity and the occupation’s requirements - must together be detailed enough to make rational comparison possible. Otherwise, the ‘finding’ that the claimant can perform alternate occupations consists only of a bald assertion.” Havens v. Continental Casualty Co., 168 Fed. Appx. 207, 2006 U.S.App.LEXIS 14618 (3rd Cir. June 13, 2006).

Second Circuit Requires SPD to Provide Sufficient Notice to Participants with respect to their Burden to Establish a Claim for Additional Benefits under the Plan. A worker claimed that, because his employer under-reported his earnings to his pension fund, he did not get the pension benefits to which he was entitled. Initially, the U.S. Second Circuit Court of Appeals confirmed that Central States does not specifically require continuing audits of the employer, so long as some affirmative attempt (in this case a series of random audits) is made to ensure that the plan is getting the contributions to which it is entitled. The court then turned to the plaintiff’s argument that the plan should have provided adequate notice that he would be required to produce his employment records in order to claim additional benefits, rather than relying on the reporting of the employer or other efforts made by the plan trustees. First, the court rejected application of the “arbitrary and capricious” standard, as no interpretation of the Plan was required. Next, the court rejected the argument that relief for the alleged breach was not available under Section 502(a)(3), concluding that such a claim could be asserted under 502(a)(1)(B). Finally, reviewing the SPD de novo, the court concluded that it did not comply with the statutory and regulatory requirements of ERISA, and remanded the case for a determination of whether there was “likely prejudice” to the plaintiff as a result of the deficient SPD. In conclusion: “ERISA's fiduciary duties do not bar pension benefit plans from requiring their participants to bear the burden of proving that they are owed additional benefits. But if funds intend to have participants shoulder this burden, and if the chance that their own records are inaccurate is more than an ‘idiosyncratic contingency,’ then the funds must give notice of this intent in their SPDs.” Wilkins v. Mason Tenders Dist. Council, 445 F.3d 572 (2nd Cir. 2006).

Sixth Circuit Affirms Fiduciary Status with Respect to Control Over Plan Assets, Even in the Absence of “Discretionary Authority”. Like most Circuits who have addressed the issue, the Sixth Circuit recently affirmed that a person who controls plan assets acquires fiduciary responsibility irrespective of whether that control is discretionary. The defendant, PHP, “still controlled plan assets after the formal conclusion of its relationship with the Company and with the plan participants. Documents in the record demonstrate that PHP terminated its contract with the Company on May 17, 2001, by which time PHP had already removed from the plan account its administrative free of $5,793.40. PHP continued to receive COBRA payments from plan participants and controlled a small amount of funds previously received from the Company. On June 6, 2001, PHP sent a letter and two checks to the Company – one covering the amount of COBRA payments that it had received through May 23, and another ‘representing the funds remaining in the M. Fine & Sons, Inc. claim account.’ PHP of course knew by this time that the Company was in dire financial straits and was unable to fund the healthcare plan. Although PHP contends that its actions correspond to its obligations under clause 9.2 of its Agreement with the Company, these actions nonetheless refute the district court’s conclusion that PHP was an ERISA fiduciary only with respect to the processing of healthcare claims. The terms of the Agreement may have limited PHP’s discretion over the remaining funds, but did not affect its control over those funds. Because fiduciary status as to plan assets does not turn on the exercise of discretion or the existence of discretionary authority, the Agreement does not alter the fact that PHP acted as a signatory and unilaterally disposed of the remaining funds.” Briscoe v. Fine, 444 F.3d 478 (6th Cir. 2006).

Courts in the Second Circuit Reaffirm the Test for Fiduciary Status as a Bi-Furcated Test; Status Can Be Predicated on Either the Granting or the Exercise of Discretionary Authority. Both the Second Circuit and a District Court sitting in the Northern District of New York recently rejected the argument that parties who were vested with discretionary authority, but did not actually exercise such authority, were not ERISA fiduciaries. The defendants attempted to argue that the Second Circuit’s decision in Blatt v. Marshall rendered formal designations of trusteeship irrelevant. Blatt merely stated that a party who exercised discretion could be a fiduciary, even if he or she were not formally appointed as a trustee; but that does not relieve a party who has been formally appointed Plan Administrator from fiduciary responsibility. The statute, the courts reaffirm, “creates a bifurcated test: Subsection one imposes fiduciary status on those who exercise discretionary authority, regardless of whether such authority was ever granted. Subsection three describes those individuals who have actually been granted discretionary authority, regardless of whether such authority is ever exercised.” Chao v. Docster, No. 3:01-cv-827 (N.D.N.Y. March 31, 2006); citing, Bouboulis v. Transp. Workers Union of America, 442 F.3d 55 (2d Cir. 2006).

Third Circuit Clarifies “Date of Last Action” under Unisys and the “Fraud or Concealment” Discovery Rule. Plaintiffs are former employees of Kodak’s Eastman Pharmaceutical Division and were participants in the Kodak Retirement Income Plan. In 1988, Kodak began to merge the Division with Sterling, which was acquired by Sanofi in 1994. As an incentive to change employment, human resources personnel allegedly advised plaintiffs that they would retain Kodak benefits moving from Kodak to Sterling, and that their retirement benefits would remain undiminished for a period of two years after changing employment to Sanofi, (continuing to accrue benefits based on the initial Kodak start date). The Kodak and Sanofi Plans appearently had some difficulty merging, and when a lump sum annuity election form was distributed in 2002, the plaintiffs discovered that the pension benefits did not cover employment with all three entities. The plaintiffs argued that, under In re Unisys Corp., 242 F.3d 497, 505-506 (3d Cir. 2001), “the date of the last action” under Section 413 can be the last date that a beneficiary makes “important financial and general life choices in reliance upon the representations” of the fiduciary. Rejecting that argument, the Court noted that it refrained, in Unisys, from choosing between the date of the misrepresentation and the date of the detrimental reliance as the date of the last action, because both were agreed by the parties to be the same. In the present case, “Kodak and Sanofi initiated the breach of fiduciary duty by purportedly misrepresenting the pension plan benefits in an attempt to persuade appellants to change employment in 1988 and 1994, respectively, and appellants relied on those activities at those times. Therefore, ‘the date of the last action’ was in 1988 for Kodak and in 1994 for Sanofi.” With respect to the discovery rule where fraud or concealment is involved, “the complaint does not contain any allegation of affirmative steps taken by either Kodak or Sanofi that prevented appellants from discovering the alleged breach of duty before the statute of limitations expired. Kodak and Sanofi’s failures to notify their beneficiaries of any change in the method of calculating retirement benefits or warn them of any misconception regarding their benefits are not ‘affirmative steps,’ and cannot on their own bring the ‘fraud or concealment’ exception into play.” Ranke v. Sanofi-Synthelabo, Inc., 436 F.3d 197 (3d Cir. 2006).

The D.C. Circuit Agrees with Most Other Circuits that Discretion is Not a Prerequisite to Fiduciary Status where the Alleged Fiduciary Exercises Control Over Plan Assets. The Secretary of Labor filed suit against an agent who accepted hundreds of thousands of dollars from twenty-nine ERISA-covered employee benefit plans for the purchase of insurance for the plans. “Under his brokerage scheme, Day sent invoices to the plans for various insurance policies, the plans paid the bills by sending checks to Day, and Day deposited the checks into his corporate account. Instead of using the plans' checks to purchase insurance, however, Day kept the money and provided the plans with fake insurance policies.” The Court rejected the defendant’s argument that he was not a fiduciary because he did not exercise any discretion over the disposition of plan assets. “Because the disposition clause contains no 'discretion' requirement, it is irrelevant whether Day exercised discretion in his thievery. ‘Any authority or control’ is enough.” Chao v. Day, 436 F.3d 234 (D.C. Cir. 2006).

Sixth Circuit Clarifies, Declines to Overrule Yard-Man “Inference” that Retiree Health Benefits Negotiated under a Collective Bargaining Agreement Are Vested. Before concluding that the district court had not abused its discretion under the specific facts and evidence presented, the Sixth Circuit clarified the appropriate inquiry as follows: The defendants “devote a great deal of energy to disputing the correctness of the Yard-Man inference. El Paso even suggests that this panel should overrule Yard-Man. These concerns are significantly overstated. El Paso and CNH America misinterpret the term ‘inference’ and confuse it with a legal presumption. Under Yard-Man we may infer an intent to vest from the context and already sufficient evidence of such intent. Absent such other evidence, we do not start our analysis presuming anything. If Yard-Man required a presumption, the burden of rebutting that presumption would fall on the defendants. However, there is no legal presumption that benefits vest and that the burden of proof rests on plaintiffs. This Court has never inferred an intent to vest benefits in the absence of either explicit contractual language or extrinsic evidence indicating such an intent. Rather, the inference functions more to provide a contextual understanding about the nature of labor-management negotiations over retirement benefits. That is, because retirement health care benefits are not mandatory or required to be included in an agreement, and because they are ‘typically understood as a form of delayed compensation or reward for past services’ it is unlikely that they would be ‘left to the contingencies of future negotiations.’ When other contextual factors so indicate, Yard-Man simply provides another inference of intent. All that Yard-Man and subsequent cases instruct is that the Court should apply ordinary principles of contract interpretation.” Yolton v. El Paso Tenn. Pipeline Co., 435 F.3d 571 (6th Cir. 2006).

U.S. Supreme Court Grants Writs to Revisit Great-West Decision. The Supreme Court will review the Fourth Circuit’s decision in Mid-Atlantic Medical Services v. Sereboff, 407 F.3d 212 (4th Cir. 2005). The Court, in that case, agreed with the district court that “in this dispute, MAMSI’s action seeks equitable restitution, as that term is used in Knudson, because MAMSI seeks to recover funds that are specifically identifiable, belong in good conscience to MAMSI, and are within the possession and control of the Sereboffs. First, the funds have not been dissipated, and they are specifically identifiable. $74,869.37 of the settlement funds are preserved by the Sereboffs in their investment accounts. Although the funds have been placed in accounts with the Sereboffs’ other monies, they can ‘clearly be traced to particular funds’ recovered in the California litigation. Second, the disputed funds belong in good conscience to MAMSI. The Plan contains express, unambiguous reimbursement provisions, according MAMSI the ‘right to recover any payments’ made to the Sereboffs by a third party. Third, the disputed funds are within the possession and control of the Sereboffs. They received those funds in the California litigation and held them in their investment accounts pending resolution of this proceeding. Under Knudson, by contrast, the funds received from the tortfeasor were placed in a Special Needs Trust, outside the possession or control of the beneficiary.” 407 F.3d at 218-219; cert. granted, 2005 U.S. LEXIS 8573 (Nov. 28, 2005).

New Supreme Court Justice Samuel Alito has authored a mixed bag of ERISA decisions. Judge Alito was the author of Leckey v. Stefano, 263 F.3d 267 (3rd Cir. 2001) (family members who were not spouses could be counted as employees); Einhorn v. Fleming Foods, 258 F.3d 192 (3rd Cir. 2001) (reversing summary judgment ordering payment of delinquent contributions based on ambiguity in collective bargaining agreement); and, Syed v. Hercules, 214 F.3d 155 (3rd Cir. 2000) (barring benefits claims under disability policy applying shorter employment statute of limitations, as opposed to longer statute applicable to breach of contract claims).

Third Circuit rejects Milofsky and concludes that participants in 401(k) plan who suffered losses may bring suit under Section 502(a)(2). Participants in the Schering-Plough Corporation 401(k) Plan brought suit against fiduciaries on behalf of the Savings Plan and all participants whose accounts included investments in Schering stock, (alleging that the defendants breached their fiduciary duties of loyalty, prudence and due care by continuing to offer the Company Stock Fund when they knew that Schering’s stock price was artificially inflated). The Third Circuit rejected the defendants’ argument that the plaintiffs could not demonstrate any losses to the Plan because any and all losses were suffered by individual participants in individual accounts. Examining the terms of the Plan, the court noted that each participant’s deferred payroll compensation was held in trust as an asset of the Savings Plan, and that, while each participant was provided with an individualized account, the Plan makes it clear that segregation of funds is not required. Rejecting the Fifth Circuit’s decision in Milofsky, the court reasoned that Russell does not preclude an action under Section 502(a)(2) by a subgroup of plan participants on the basis that the fiduciaries’ alleged breach did not affect the investments of participants in other subgroups. “The Plaintiffs in this case do not seek to force the Savings Plan to purchase annuities for their individual benefit. Instead, they seek to force the Defendants to make payments to the Savings Plan for the Defendants' alleged failure to fulfill their fiduciary obligations, in order to remedy the damage their actions caused to the Savings Plan. The fact that damages paid to the Savings Plan for breaches of fiduciary duties will also indirectly benefit its participants does not bar a derivative action under Sections 409 and 502(a)(2).” In re: Schering-Plough Corp. ERISA Lit., 420 F.3d 231 (3rd Cir. 2005).

District Court allows suit for breach of fiduciary duty brought by plan participant against plan’s PBM to proceed. Robert Moeckel, a participant in the John Morrell & Co. Employee Benefit Plan, brought suit for breach of fiduciary duty against Caremark, the plan’s Pharmacy Benefits Manager (“PBM”). The suit seeks statutory relief on behalf of the Plan, pursuant to Section 502(a)(2), as well as injunctive and equitable relief for the Plan and its participants who paid percentage co-payments, pursuant to Section 502(a)(3). Judge Trauger, sitting in the Middle District of Tennessee, rejected Caremark’s arguments that Moeckel: (i) lacked Article III standing; (ii) lacked statutory “standing” to sue on behalf of the Plan; (iii) was required to comply with Federal Rule 23.1; and (iv) should have exhausted some type of undefined administrative remedies. Judge Trauger also rejected Caremark’s argument that (v) Caremark could not be considered a fiduciary as a matter of law. The court appropriately held that, even though Caremark was not a named fiduciary, it could nevertheless serve as a "functional fiduciary" to the extent Caremark exercises control over plan assets or discretionary authority in the management of the Plan. Despite the boiler-plate language inserted by Caremark in its standard-form contracts that “nothing in this Agreement shall be deemed to confer upon Caremark the status of fiduciary as defined in the Employee Retirement Income Security Act of 1974,” Judge Trauger appropriately recognized that “courts examine the conduct at issue to determine whether it constitutes ‘management’ or ‘administration’ of the plan” (emphasis added), and held that “whether Caremark Inc. constitutes a ‘functional fiduciary’ is a crucial, and open, question.” Moeckel v. Caremark Inc., 385 F.Supp.2d 668 (M.D. Tenn. 2005). [NOTE - Herman Mathis, who represents Mr. Moeckel, has been engaged in the investigation and prosecution of claims against PBMs since 2000, and represents state and municipal plans, corporate plan sponsors, union trustees, plan participants and insurance companies against Caremark, Express Scripts, Medco and AdvancePCS in State and Federal Courts throughout the country. Maury Herman has been appointed Lead Counsel in In re: Express Scripts Pharmacy Benefits Management Litigation, MDL No. 1672, and Stephen J. Herman has also been appointed to the Plaintiffs’ Steering Committee.]

Chief Justice John Roberts represented the Chamber of Commerce in Varity and Rush Prudential in Moran. As an attorney, Roberts represented the Chamber of Commerce as amicus curiae against the plaintiffs in Varity v. Howe, 516 U.S. 489, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996), and Rush Prudential HMO in Rush Prudential v. Moran, 536 U.S. 355, 122 S.Ct. 2251, 153 L.Ed.2d 375 (2002). Roberts also represented MITRE Group Health Plan denying coverage to a beneficiary who suffered from schizophrenia. See Klebe v. MITRE, No. 95-2728, 1996 U.S. App. LEXIS 17696 (4th Cir. July 19, 1996).

Tenth Circuit joins Third, Eighth and Ninth Circuits that authority or control over plan assets does not have to be "discretionary". On May 19, 2005, the U.S. Court of Appeals for the Tenth Circuit held that accountants who received plan contributions, deposited them into his business account, and then wrote checks for the amount of the contribution on behalf of the plan were fiduciaries. Rejecting the argument that these responsibilities were "ministerial", the court re-affirmed the distinction in the ERISA statute between plan management or administration (which must be "discretionary") and control over plan assets ("any" authority or control), noting that "the practical reality is that Mr. Madsen had total control over the plan’s money while it was in his account" which is "precisely while control over assets is treated differently than control over management." Coldesina v. The Estate of Greg P. Simper, 407 F.3d 1126 (10th Cir. 2005).

Equitable set-off of attorneys fees against pension benefits of participant asserting unsuccessful claim under ERISA Section 502(a)(1). Plaintiff brought a claim for an increase in his disability benefits. The claim was denied, and attorneys fees were assessed against the plaintiff. In addition, the court granted an equitable set-off against future benefits to ensure payment of the attorneys’ fees. The Third Circuit reversed. “While it may be argued that plan participants, like Martorana, who bring suits which are ultimately found to be frivolous, deserve the same treatment as fiduciaries who breach a duty to the Plan and ‘loot’ the fund, we are not persuaded. For, unlike a deliberate looter, a plan participant who, in earnest, but in error (and perhaps obstinately) seeks to enforce or clarify plan rights he believes he has, does not act with complete disregard for the well-being of the very fund which he is supposed to help manage. The fact that ERISA allows for the award of attorney's fees to the prevailing party at the discretion of the court in suits such as the one brought by Martorana is generally sufficient, we believe, to prevent plaintiffs from bringing suits which they know or strongly suspect to be without merit. There is no need to increase deterrence by running afoul of the statutory prohibition and assessing fees against the pension benefits of such participants.” See Martorana v. Board of Trustees, Steamfitters, Local 420, 404 F.3d 797, 804 (3rd Cir. 2005).

The Ninth Circuit holds that failure to comply with the time limitations imposed by 29 C.F.R. §2560.503-1(h) does not require de novo review; technical violations of the Act do not alter the standard of review unless they result in substantive harm. In 2002, (opinion withdrawn and superceded in 2003), the Ninth Circuit, in Jebian v. Hewlett-Packard, held that the plan administrator’s failure to decide an appeal within 120 days justified de novo review – where the Plan provides for the 120-day period found in the regulations. On May 31, 2005, the Court refused to apply the holding where the participant or beneficiary relies on the regulation alone. The district court, in that case, had concluded that once an administrator has violated the regulation’s time limitation, the "deemed denied" language operates to cut off the administrator’s discretion, making de novo review appropriate. "Instead" the Court held, "we read the ‘deemed denied’ language to provide beneficiaries with a ‘final decision’ from which to appeal if the administrator has not made a decision within the timelines established in the regulation." Further, the Court held that "procedural violations of ERISA do not alter the standard of review unless those violations are so flagrant as to alter the substantive relationship between the employer and employee, thereby causing the beneficiary substantive harm." Gatti v. Reliance Standard Life Ins. Co., 409 F.3d 1061 (9th Cir. 2005).

The Sixth Circuit finds that breach of fiduciary duty claims for improper processing emergency-medical-treatment claims are excused from the exhaustion requirement under the futility exception. "Although it is well settled that ERISA plan beneficiaries must exhaust administrative remedies prior to bringing a suit for recovery on an individual claim, we have not yet decided whether a beneficiary must exhaust administrative remedies prior to bringing claims based on statutory rights, such as §§ 1104 and 1105 fiduciary-duty claims. Instead, we have resolved such cases on the grounds that exhaustion would be futile or that the fiduciary-duty claim is merely a repackaged claim for individual benefits which the beneficiary must administratively exhaust before filing suit. Because requiring the Plaintiffs to exhaust administrative remedies would be futile in this case, we again find it unnecessary to decide the more difficult issue of whether exhaustion of administrative remedies should be required for statutorily created rights." Hill v. Blue Cross & Blue Shield, No. 03-2607, 2005 U.S. App. LEXIS 8446, 2005 FED App. 0216P (6th Cir. May 13, 2005).


Stephen J. Herman, Esq.

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[Note - The views expressed on this law blog / blawg relating to ERISA law, including managed care litigation, HMO litigation, and PBM litigation, are the observations of Steve Herman as a practicing attorney and are not intended to represent the views of Herman Herman Katz & Cotlar, Herman Mathis, the HM PBM Co-Counsel Group, LTLA, LAJ, ATLA, AAJ, Public Justice, TLPJ, Loyola Law School, the Civil Justice Foundation, or any other organization.]

Updated on February 20, 2008