Claims require an 'independent decision,' not a 'review'
Chicago Daily Law Bulletin
July 6, 2009
by MARK D. DEBOFSKY
The 7th U.S. Circuit Court of Appeals recent ruling in Krolnik v. Prudential Ins.Co., 2009 U.S.App.LEXIS 13916 (June 29), constitutes the definitive statement as to the scope of ERISA claims adjudication under the de novo standard. Krolnikinvolved a relatively typical disability insurance benefit claim under a group policy issued by Prudential Insurance Company. The plaintiff filed suit to challenge Prudential's imposition of a policy provision limiting the duration of benefit payments to two years for psychiatric disabilities. Although the parties stipulated to the applicability of the de novo standard, the court refused to allow the plaintiff the opportunity to take discovery or to submit affidavits from the treating doctors; and the court awarded the insurer summary judgment without even mentioning evidence in the record contrary to the applicability of the two year limitation. The court of appeals reversed.
The court began its discussion by explaining the term "'de novo review' is a misleading phrase," and adding, "whatFirestone [v. Bruch, 489 U.S. 101 (1989)] requires is not 'review' of any kind; it is an independent decision rather than 'review' that Firestone contemplates" (emphasis in original). Looking at the text of the Firestone ruling, the court pointed to the Supreme Court's directive that "litigation under ERISA by plan participants seeking benefits should be conducted just like contract litigation, for the plan and any insurance policy are contracts. 489 U.S. at 112-13." And in contract litigation, the court is not reviewing either party's determination - "Instead the court takes evidence (if there is a dispute about a material fact) and makes an independent decision about how the language of the contract applies to those facts."
The court then presented an analogy of a typical insurance dispute litigated under diversity jurisdiction where the court does not examine what evidence the insurer considered but decides from the evidence "where the truth lies." A court adjudicating such a dispute would not "dream of forbidding the parties to take discovery" or disallow affidavits because "[e]vidence is essential if the court is to fulfill its fact-finding function. Just so in ERISA litigation." (The 7th Circuit did, however, distinguish cases where review is deferential - in such cases, "review is limited to the administrative record. See Perlman v. Swiss Bank Corp., 195 F.3d 975 (7th Cir. 1999)."
The court thus found that the medical evidence presented to the insurer could be placed in the judicial record and could constitute the whole record. But discovery could only be curtailed based on the limitations set forth in the Federal Rules of Civil Procedure - "'The court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.' Fed. R. Civ. P. 26(c)(1)."
By the same token, Krolnik made it clear that summary judgment would be inapt in ERISA litigation conducted under the de novo standard where the evidence is in conflict. And in this case, the court found the policy limitation would be inapplicable, regardless of the medical situation in the past, "[i]f Krolnik's limitations today are entirely physical (or if physical problems disable him no matter what his mental state)." Thus, given that the record included medical evidence supporting Krolnik's physical inability to work, a trial was required.
The court added, "And at trial Krolnik would be free to offer medical evidence of his own and cross-examine the physicians who produced the reports that underlie Prudential's decision. See Richardson v. Perales, 402 U.S. 389 (1971) (even when written medical reports are used as the principal evidence in a disability-benefits proceeding, the adverse party is entitled to cross-examine the physicians who prepared the reports)."
Krolnik is consistent with Diaz v. Prudential Ins.Co., 499 F.3d 640, 643 (7th Cir. 2007), which also held that that judges make independent decisions under the de novo standard. However, both Diaz and Krolnik markedly depart from other circuit decisions, such as Jewell v. Life Ins.Co. of North America, 508 F.3d 1303 (10th Cir. 2007); cert. denied 128 S.Ct. 2872 (2008), which explicitly held that ERISA cases conducted under both the de novo and abuse of discretion standards should be conducted as review proceedings. Krolnik presents the better-supported view, though. The ERISA statute affords benefit claimants the right to bring a "civil action" to enforce their rights under the statute. 29 U.S.C. § 1132(a). That terminology denotes a plenary court proceeding, rather than a claim record review, based on the principles established inChandler v. Roudebush, 425 U.S. 840 (1976). Although Chandler involved a claim for employment discrimination based on § 717(c) of the Civil Rights Act, 42 U.S.C. §2000e et seq., rather than an employee benefit dispute, its delineation between statutes that invoke review proceedings and those that trigger plenary adjudication explains:
"In most instances, of course, where Congress intends review to be confined to the administrative record, it so indicates, either expressly or by use of a term like 'substantial evidence,' which has 'become a term of art to describe the basis on which an administrative record is to be judged by a reviewing court.' Ibid. E. g., 5 U.S.C. § 706 (scope-of-review provision of Administrative Procedure Act); 12 U.S.C. § 1848 (scope-of-review provision applicable to certain orders of the Board of Governors of the Federal Reserve System); 15 U.S.C. § 21 (c) (scope-of-review provision applicable to certain orders of the Interstate Commerce Commission, the Federal Communications Commission, the Civil Aeronautics Board, the Federal Reserve Board, and the Federal Trade Commission); 21 U.S.C. § 371 (f)(3) (scope-of-review provision applicable to certain orders of the Secretary of Health, Education, and Welfare)." 425 U.S. at 862 n.37.
ERISA makes no reference whatsoever to substantial evidence or other terms of art typically associated with administrative law that would signal Congress' intent to authorize a review proceeding rather than a trial, just as the statute at issue in Chandler was also held to invoke plenary adjudication. Hence, the imposition of a review proceeding is entirely misplaced.
Likewise, United States v. First City National Bank, 386 U.S. 361 (1967), offers helpful guidance. First City involved construction of certain provisions of the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(7)(A) and § 1828(c)(7)(B), which specified the standards to be applied by a court in a judicial proceeding challenging a bank merger. Section 1828(c)(7)(A) stated, "In any such action [to challenge a bank merger], the court shall review de novo the issues presented." In interpreting that provision to describe the type of court proceeding that would be conducted, the Court explained:
"It is argued that the use of the word 'review' rather than 'trial' indicates a more limited scope to judicial action. The words 'review' and 'trial' might conceivably be used interchangeably. The critical words seem to us to be 'de novo' and 'issues presented.' They mean to us that the court should make an independent determination of the issues." 386 U.S. at 368.
The Supreme Court's construction and analysis is almost identical to the one utilized in Krolnik by the 7th Circuit.
Finally, the Supreme Court pointed out in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 114 (1989), that ERISA's passage was never intended to afford "less protection to employees and their beneficiaries than they enjoyed before ERISA was enacted." Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 114 (1989). Historically, disputes over entitlement to disability benefits provided as employee benefits were resolved through plenary court proceedings. See, e.g., Cox v. Washington Natl. Insur.Co., 520 S.W.2d 76 (Ct.App.Mo. 1974)(employer sponsored disability benefit claim accorded plenary civil procedure); Antram v. Stuyvesant Life Insur.Co., 287 So.2d 837 (Ala. 1973)(same). Indeed, even under the law of trusts, which underpins much of ERISA according to Firestone, plenary proceedings have historically been the norm. See, e.g., Barnett v. Ross, 333 Pa. 510, 3 A.2d 923, 925 (Pa. 1939) (in an action for breach of implied trust by fiduciary, plaintiff beneficiary may seek a bill of discovery in equity to support a claim of existence of trust and misconduct of alleged trustee); Phelps Dodge Corp. v. Brown, 112 Ariz. 179, 540 P.2d 651 (1975) (jury trial conducted);Matthews v. Swift & Co., 465 F.2d 814 (5th Cir. 1972) (plenary bench trial of pension and disability claim despite arbitrary and capricious standard of review). Consequently, the short, but nonetheless definitive ruling in Krolnik will have nationwide influence and will undoubtedly have a marked impact on the future of ERISA litigation.
Note: I was plaintiff's counsel in Diaz v. Prudential and represented the petitioner in Jewell v. Life Ins.Co. of North Amer.in a petition for certiorari filed with the Supreme Court.