Appeals court clarifies factors for fee awards

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Appeals Court clarifies factors for fee awards

Chicago Daily Law Bulletin
September 9, 2008

by MARK D. DEBOFSKY

A federal appeals court recently examined the issue of when attorney fees are properly awarded in cases brought under the Employee Retirement Income Security Act.

The 6th U.S. Circuit Court of Appeals case of Gaeth v. Hartford Life Insurance Co., 2008 U.S.App.LEXIS 17590 (6th Cir., Aug. 19), involved a former sales manager for Oracle Corp. who became disabled in 1989 and began receiving disability benefits from Hartford Life Insurance Co. After several years of uninterrupted payments, Hartford learned that Carl Gaeth was operating an antique lamp restoration business and terminated the benefit payments, alleging fraud. Hartford also reported Gaeth to law enforcement authorities in Kentucky; and although Gaeth was indicted on a charge of insurance fraud, the indictment was dismissed and never refiled.

Gaeth then sued Hartford, seeking restoration of his disability benefits. The court sided with Gaeth, finding that Hartford improperly relied solely on surveillance showing no more than 10 minutes of activity per day. The court said the decision was made without any consideration whatsoever as to Gaeth's medical condition and whether his illness prevented him from returning to his prior occupation. However, the court could not tell from the record whether Gaeth's disability continued and remanded the matter to the insurer for further investigation.

The court also awarded attorney fees. The only issue appealed by Hartford was the propriety of the fee award.

The 6th Circuit reviewed the fee award for an abuse of discretion, a standard allowing reversal only ''when the court has the definite and firm conviction that the district court made a clear error of judgment in its conclusion upon weighing relevant factors.'' Moon v. Unum Provident Corp., 461 F.3d 639, 643 (6th Cir. 1996). The court recognized that fee awards made pursuant to 29 U.S.C. §1132(g)(1) may be awarded to either party.

The court then set forth the prevailing test for a fee award under ERISA pursuant to its precedent set in Secretary of the Department of Labor v. King, 775 F.2d 666 (6th Cir. 1985): ''(1) the degree of the opposing party's culpability or bad faith; (2) the opposing party's ability to satisfy an award of attorney fees; (3) the deterrent effect of an award on other persons under similar circumstances; (4) whether the party requesting fees sought to confer a common benefit on all participants and beneficiaries of an ERISA plan or resolve significant legal questions regarding ERISA; and (5) the relative merits of the parties' positions.''

The 6th Circuit faulted the trial court for not following that test and instead following the test used by the 2d Circuit in accordance with Chambless v. Masters, Mates & Pilots Pension Plan, 815 F.2d 869, 871 (2d Cir. 1981), which contains minor but material differences from the 6th Circuit test.

The trial court's rationale for the fee award, simply stated, was ''that the termination of Gaeth's benefits was arbitrary and capricious, that Hartford has the ability to pay Gaeth's attorney fees, that a fee award might deter Hartford from making such unsupported decisions in the future, and that the deterrent effect of awarding fees could benefit not only Gaeth but other claimants.'' The court examined each of those points.

Although Moon ruled that a finding of arbitrary and capricious behavior does not necessarily indicate culpability or bad faith, the 6th Circuit held that a fair reading of the trial court's opinion ''found culpability on Hartford's part.'' The court also cited both Moon and Hoover v. Provident Life & Accident Insurance Co., 290 F.3d 801, 809-10 (6th Cir. 2002), as cases supporting a culpability finding when the insurer relied solely on its in-house physician who never examined the claimant. Here, because there was no consideration whatsoever of a medical finding, the court found that Hartford's determination ''was arguably based on even less competent evidence.''

The appeals court found no basis to disturb the determination that Hartford had the ability to satisfy an award of attorney fees.

Turning to the issue of the deterrent effect of the fee award, the court ruled that Hartford's argument was well-taken. Hartford asserted that the factor required consideration of ''the deterrent effect on other plan administrators facing similar circumstances, but that the court considered the deterrent effect only on Hartford.''

Finding Moon particularly instructive, the court cited its admonition that the Moon ruling was instructive as to an important principle universally applicable to all plan administrators - i.e., ''before terminating a plan participant's benefits, a plan administrator should ensure that the opinions upon which they rely to make their decisions to terminate are based on a thorough review of the administrative record.''

Nonetheless, despite finding error in the trial court's analysis, the 6th Circuit determined that the court on remand would find that the deterrent effect on Hartford would apply to all plan administrators. Since Hartford's error was in making a decision to terminate benefits without any supporting medical evidence, the court found the ruling against Hartford created a strong deterrent factor.

As to the issue of common benefit, Hartford argued that the fee award to Gaeth did not confer a common benefit on others, and that the case did not resolve a significant ERISA legal question. The court agreed, finding that Gaeth was only seeking benefits for himself and that other beneficiaries of the Oracle plan were not aided. Nor did the district judge find that the award in favor of Gaeth resolved a significant legal question. Nonetheless, the court determined that the plaintiff did not need to prevail on each of the factors, and thus turned to the final issue.

In addressing the relative merits of the parties' positions, the court found this factor weighed against an award of fees, and ruled that the trial court's failure to analyze this issue amounted to an abuse of discretion. Because there was minimal objective evidence supporting ongoing disability, there remained a possibility that Hartford would ultimately prevail in showing that Gaeth was no longer disabled.

The court added that an award of fees under these circumstances leaves open the possibility that the party who ultimately wins has to pay the losing party. Because 29 U.S.C. §1132(g) does not contain a prevailing party standard, the court found it might still be appropriate to award fees to the plaintiff.

However, the court also noted that ''the possibility that Gaeth could receive attorney fees from Hartford even if he ultimately loses his case underscores the importance of carefully analyzing the relative merits of the parties' positions.'' Nonetheless, the court refused to address ''whether a district court would always abuse its discretion by awarding attorney fees to a losing party, or to a claimant who has yet to obtain the sought-after award of benefits.'' Instead, the court remanded the matter to the district judge for reconsideration of his ruling under the appropriate test.

Closer to home, the 7th Circuit has adopted a sensible approach to cases such as this - if benefits are terminated using defective procedures, the court is to restore the status quo ante since the plan administrator remains free to adjudicate a claimant's ongoing entitlement to benefits. See Schneider v. Sentry Group Long Term Disability Plan, 422 F.3d 621 (7th Cir. 2005). The 6th Circuit also issued a similar ruling in Wenner v. Sun Life Assurance Company of Canada, 482 F.3d 878 (6th Cir. 2007).

The procedural posture of the Gaeth case made it a difficult one for the 6th Circuit, given that Gaeth might ultimately recover nothing. The fact that the trial court remanded in the first place is an issue that bears closer examination. Unlike the Social Security Act, which contains explicit statutory authorization for remands (42 U.S.C. §405(g)), there is no provision in ERISA that provides for remands. Moreover, remands are antithetical to the rule that federal courts are to issue final judgments based on Article III, section 2, of the U.S. Constitution, which provides that courts are to decide cases and controversies. Consequently, remand orders amount to little more than impermissible advisory opinions.

According to Preiser v. Newkirk, 422 U.S. 395, 401-402, 95 S.Ct. 2330, 45 L.Ed.2d 272 (1975), ''The exercise of judicial power under Article III of the Constitution depends on the existence of a case or controversy. As the court noted in North Carolina v. Rice, 404 U.S. 244, 246 (1971), a federal court has neither the power to render advisory opinions nor 'to decide questions that cannot affect the rights of litigants in the case before them.' Its judgments must resolve 'a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.' '' (Citations omitted.)

As to the fee award in this case, the trial court's ruling illustrates the deterrent value of fee awards. If every disability insurer could get away with basing decisions solely on unreliable surveillance without any consideration of medical evidence, more insurers would emulate that conduct. Thus, the finding of culpability should alone have been enough to trigger a fee award.

The main test in assessing fees is the ''bad faith'' or ''culpability'' factor; and it is important to remember the quote fromProduction & Maintenance Employees' Local 504, Laborers' International Union v. Roadmaster Corp., 954 F.2d 1397, 1405 (7th Cir. 1992), which holds: ''Despite the references to 'good faith' and 'harassment,' we do not read [Meredith v. Navistar International Transportation Co., 935 F.2d 124, 129 (7th Cir. 1991)] to mean that a party must actually show subjective bad faith to justify a fee award. Requiring a showing of subjective bad faith would defeat the purpose of this presumption (modest though it may be) because of the difficulty of proving subjective bad faith. Attorney fee litigation is time-consuming and tedious enough without adding subjective inquiries into litigants' and attorneys' good or bad faith. Instead, we take Meredith's reference to 'good faith' and 'harassment' simply to mean that a party who pursues a position that is not substantially justified - that is, a position without a 'solid basis' - has, in an objective sense, really done nothing more than harass his opponent by putting him through the expense and bother of litigation for no good reason.

Hartford's conduct in this case was particularly harassing since it required Gaeth to defend himself against criminal charges even though Hartford had no medical evidence whatsoever that Gaeth had medically improved since he became disabled.

Moreover, even under the circumstances presented, the fee award was entirely justified even by the remand itself, assuming the propriety of that procedural remedy. The mere fact of the remand left Gaeth in the status of a prevailing party according to the Supreme Court's finding that ''a prevailing party is one who achieves a judicially sanctioned and material change in the legal relationship between the parties. Buckhannon Board & Care Home Inc. v. West Virginia Department of Health and Human Resources, 532 U.S. 598, 604-05, 121 S.Ct. 1835, 149 L.Ed.2d 855 (2001).'' That same authority makes it clear that the ''judicially sanctioned change'' ''need not be a judgment on the merits, and a prevailing plaintiff need not achieve directly through the judicial order itself the ultimate benefit sought. Carbonell v. INS, 429 F.3d 894, 899 (9th Cir. 2005); see also Hewitt v. Helms, 482 U.S. 755, 761, 107 S.Ct. 2672, 96 L.Ed.2d 654 (1987) ('[T]he judicial decree is not the end but the means. ... The real value of the judicial pronouncement ... is in the settling of some dispute which affects the behavior of the defendant toward the plaintiff.').''

Indeed, remands to administrative agencies have long been held sufficient to result in prevailing party status and to allow for the payment of fees. Even if the merits of the underlying claim remain to be decided, the remand would trigger prevailing party status under the Equal Access to Justice Act. Rueda-Menicucci v. INS, 132 F.3d 493, 495 (9th Cir. 1997); see also Li v. Keisler, 505 F.3d 913, 917-18 (9th Cir. 2007); and Johnson v. Gonzales, 416 F.3d 205, 208-10 (3d Cir. 2005) (joining the 9th and 7th circuits in concluding that an alien who prevails on a petition for review and whose case is remanded to the BIA is a prevailing party).

For example in Social Security cases the same rule applies ''even though the court's only action is to remand the case.'' See Shalala v. Schaefer, 509 U.S. 292, 300-02, 113 S.Ct. 2625, 125 L.Ed.2d 239 (1993). Thus, while further explanation is required, the district judge in Gaeth would be on solid ground in reinstating the fee award.

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