The year in employee benefits

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The year in employee benefits

Chicago Daily Law Bulletin
April 26, 2008

by MARK D. DEBOFSKY

Employee benefits issues have occupied the courts recently and will continue to do so. Court decisions have reflected the most prevalent current economic issues, and also have addressed issues that will be decisive in the upcoming national election.

For example, the debate over national health care has resulted in conflicting decisions relating to local initiatives aimed at expanding health care coverage to the uninsured.

In Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007), the 4th U.S. Circuit Court of Appeals rejected efforts by the State of Maryland to encourage large retailers such as Wal-Mart to provide health insurance coverage to all of its workers. Citing the broad sweep of ERISA preemption, the court ruled that the Maryland statute impermissibly interfered with the workings of that law.

However, in a preliminary injunction ruling issued by the 9th Circuit, in Golden Gate Restaurant Association v. City and County of San Francisco, 512 F.3d 1112 (9th Cir. 2008), the appeals court found that a San Francisco ordinance mandating that employers provide health care or pay into a city-sponsored health insurance program was not preempted by ERISA since it gave employers a choice as to how to go about providing health care rather than mandating a fixed choice.

In yet another ruling involving health benefits, AARP v. EEOC, 489 F.3d 558 (3d Cir. 2007); cert. denied 76 U.S.L.W. 3510 (3/24/2008), the 3d Circuit finally resolved a long-running legal dispute relating to retiree health insurance coverage. The court determined that employers were not required to spend the identical amount on premiums as it paid for the regular work force or provide identical coverage. The AARP ruling allowed employers to provide a supplement to Medicare in order to reduce health care cost expenses.

Finally, on the topic of health benefits, the 8th Circuit ruled in Administrative Committee of the Wal-Mart Stores v. Shank,500 F.3d 834 (8th Cir. 2007), that Wal-Mart had the right to seek reimbursement of health benefits paid to one of its employees who subsequently recovered damages from a tortfeasor, although not enough damages, after paying back the retailer, to meet her ongoing medical needs. In the aftermath of that ruling, The Wall Street Journal carried a front page story decrying what appeared to be an unfair result - ''Wal-Mart Prevails in Case to Recover Health Costs'' (March 18, 2008). Subsequently, as a gesture of good will despite its court victory, Wal-Mart announced that it would forgo recovery, although other insurers and self-funded plans, including Wal-Mart, continue to aggressively push for reimbursement of health benefit payouts.

Another set of rulings issued this past year relate to losses by 401(k) plans into which employees have invested their retiree savings.

In Harzewski v. Guidant Corp., 489 F.3d 799 (7th Cir. 2007), the 7th Circuit allowed employees to pursue a suit for relief from allegedly imprudent fiduciary behavior in not divesting employer stock. However, in DiFelice v. US Airways Inc., 497 F.3d 410 (4th Cir. 2007), the 4th Circuit found that an employer properly employed an independent fiduciary who approved investment in corporate stock by the 401(k) plan despite the later bankruptcy filing by the employer.

The biggest ruling of the year on retirement losses, though, was issued in LaRue v. DeWolff, Boberg & Associates, 128 S.Ct. 1020 (2008), which dramatically expanded the scope of remedies available under the ERISA law. Prior to LaRue,employees were barred from suing for losses to their retirement accounts resulting from imprudence by the plan administrators. LaRue, which involved an employee who suffered losses when his plan administrator disregarded specific investment instructions, reinstated a claim seeking recovery for the losses. However, based on the structure of the ERISA law, the Supreme Court ruled that the plaintiff was required to bring his claim on behalf of his retirement plan in order for the plan to recover for the losses which could then be paid to the plaintiff.

LaRue may be only the beginning of a trend toward expanding ERISA remedies.

In Amschwand v. Spherion Corp., 505 F.3d 342 (5th Cir. 2007), petition for cert. filed 12/21/07 (No. 07-841), the Court of Appeals expressed sympathy for the plaintiff but found that the ERISA law lacked a remedy for damages caused by an employer's misrepresentation as to an employee's life insurance coverage, which resulted in the employee's widow not being able to recover benefits. The Supreme Court has directed the solicitor general to provide its view on whether the court should accept review and allow a plan beneficiary to bring an action for monetary losses as a claim under the law of equity.

The Supreme Court has been resistant to allowing claims under the ERISA law seeking money damages; however, the solicitor general has already filed a number of amicus briefs arguing that such claims can be viewed as equitable and thus fit within the ERISA law's restriction of remedies to claims for benefits or other ''appropriate equitable relief.''

Also on the horizon is Glenn v. Metropolitan Life Insurance Co., 461 F.3d 660 (6th Cir. 2006), petition for cert. granted Jan. 18, 2008 (No. 067-923). A ruling is expected by the end of this term answering two questions that can be paraphrased as follows: (1) if an insurer both administers a benefit program and pays benefits out of its own funds, does that present an actual or potential conflict of interest that might encourage a denial of benefits? (2) If the answer to the first question is in the affirmative, how is the conflict to be considered in litigation involving a benefit denial?

Glenn, which involved a claim for disability insurance benefits, resulted in a finding by the 6th Circuit that the insurer had acted arbitrarily and capriciously in denying benefits in the face of clinical evidence demonstrating a severe cardiac impairment and despite a favorable Social Security disability determination. Although only one sentence in the opinion mentioned the potential conflict that MetLife faced on account of its dual role as plan administrator and payor, the Supreme Court granted MetLife's petition for certiorari to try to resolve an issue left open since the Supreme Court's decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), which raised the issue of the potential conflict and mandated that it be considered, but offered no guidance to the lower courts as far as how to take the conflict into consideration.

Glenn may turn out not to be all that significant, though, with respect to insured benefit plans. As the result of an initiative by the National Association of Insurance Commissioners, model legislation has been promulgated that bans clauses in insurance policies that would trigger the arbitrary and capricious standard of review. Illinois is one of the states that has adopted the law via regulation - 50 Ill.Admin.Code §2001.3 (effective July 1, 2005). In two other states, laws modeled after the NAIC proposal have survived their first court challenges.

Both American Council of Life Insurers v. Watters, 2008 U.S.Dist.LEXIS 15185 (W.D. Mich., Feb. 29), and Standard Insurance Co. v. Morrison, 2008 U.S. Dist. LEXIS 16579 (D. Mont., Feb. 27), rejected claims that states lack the authority under the ERISA law and federalism to adopt laws prohibiting clauses that could affect ERISA-governed benefit plans. The reason is that when the ERISA law was enacted in 1974, it carved out a specific exception allowing state laws that regulate insurance. 29 U.S.C. §1144(b)(2)(A). However, the following section of the ERISA law makes it clear that self-funded entities will not be ''deemed'' insurance companies subject to state regulation.

Finally, the 7th Circuit's ruling in Diaz v. Prudential Insurance Co., 499 F.3d 640 (7th Cir. 2007), has major implications in the future of ERISA litigation. Since the Firestone v. Bruch case, the federal courts have adopted an approach to ERISA litigation that treats the civil action authorized by 29 U.S.C. §1132(a) as a review proceeding rather than a plenary proceeding allowing for testimony and cross-examination. In Diaz, the 7th Circuit made it clear that when the de novo standard applies, ''the district courts are not reviewing anything; they are making an independent decision about the employee's entitlement to benefits.'' 499 F.3d at 643.

Thus, courts will need to rethink their approach to ERISA cases since the model of a review proceeding drawn from administrative law appears inapplicable.

I was counsel in the Diaz case mentioned in this article. I was also a witness in the Standard Insurance v. Morrison case and co-authored an amicus brief in the Metropolitan Life Insurance v. Glenn case currently pending before the Supreme Court.

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