Is exhaustion of administrative remedies in challenging Employee Retirement Income Security Act-governed benefit denials required as a precondition to filing a lawsuit? A concurring opinion in Wallace v. Oakwood Healthcare Inc.[1] by U.S. Circuit Judge Amul Thapar of the Sixth Circuit raises provocative questions about the administrative exhaustion doctrine in ERISA cases and suggests that other aspects of ERISA litigation are also ripe for reexamination.

Wallace presented an unusual fact pattern. The plaintiff, Cheryl Wallace, was a registered nurse and a longtime employee of Oakwood Healthcare in Michigan. Wallace contracted a debilitating illness while traveling in Belize in 2012 that caused her to take a medical leave from work following her return.

Although Wallace attempted to return to work in 2013, she was only able to work for about a month before needing to be out of work again; and she was unable to resume working thereafter. Because Wallace’s employer changed disability insurers as of Jan. 1, 2013, it was unclear which insurer was responsible for paying her long-term disability benefits.

Wallace initially applied for disability benefits with Reliance Standard Life Insurance Co., which took over the policy in 2013, but her claim was denied based on the policy’s preexisting condition exclusion clause; and Wallace was advised to file a claim with the insurer in 2012, Hartford Life and Accident Insurance Company.

She did so, but that claim was also denied. Wallace then chose to file suit and ultimately recovered a judgment against Reliance.

Reliance appealed, though; and while the U.S. Court of Appeals for the Sixth Circuit upheld the lower court’s findings on some issues, the judgment was overturned and the lower court was ordered to reevaluate a number of factual issues in order to determine whether Hartford or Reliance, or perhaps neither, was responsible for paying the claim.[2]

What is especially notable about this case is the concurrence authored by Judge Thapar on the issue of whether ERISA benefit claimants need to exhaust appeals prior to commencing litigation. The concurrence focused on the underlying basis for the exhaustion requirement and began by framing the fundamental issue that raised his concern:

It is troubling to have no better reason for a rule of law than that the courts made it up for policy reasons. Yet that seems to be the case with ERISA’s exhaustion requirement. Federal courts should reconsider when — or even whether — it’s legitimate to apply this judge-made doctrine.

Quoting The Federalist No. 78 by Alexander Hamilton, Judge Thapar observed that Congress, not the judiciary, has the power to “prescribe[ ] the rules by which the duties and rights of every citizen are to be regulated.”[3] That power is exercised through legislation; or with respect to private rights, parties may regulate their rights and obligations contractually.

However, as to legislatively created claims and causes of action, the concurrence pointed out: “But when courts stray from the texts of these laws or the terms of these contracts, they wield power that is not rightly theirs.”

Judge Thapar followed up on his questioning whether the judiciary could impose extrastatutory and extracontractual obligations by remarking: “It’s hard to square these principles with the ERISA exhaustion doctrine. Or at the very least, with the way courts talk about the doctrine.” Numerous court rulings have freely acknowledged that the doctrine of administrative exhaustion of ERISA claim is court-created rather than imposed by statute or contract.

Indeed, neither ERISA Section 503,[4] which calls for a full and fair review of benefit denials and is cited as the basis for the exhaustion doctrine, or any other statutory provision in ERISA mandates administrative exhaustion. Nonetheless such a requirement has been created and uniformly enforced by all federal courts.

As justification for exhaustion, one of the seminal cases from the U.S. Court of Appeals for the Fifth Circuit in 1985, Denton v. First National Bank of Waco, spoke of the need

(1) to uphold Congress’s desire that ERISA trustees be responsible for their actions, not the federal courts; (2) provide a sufficiently clear record of administrative action if litigation should ensue; and (3) assure that any judicial review of fiduciary action (or inaction) is made under the arbitrary and capricious standard, not de novo.[5]

While such goals may be commendable, they are all extrastatutory. As Judge Thapar pointed out, under ERISA, Congress gave plan participants and their beneficiaries the authority to file a civil action “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.”[6]

Such claims are based on the terms of employee benefit plans. In other words: “The statute is the procedural scaffolding, the plan documents the source of substantive rights.”

Judge Thapar emphasized that the ERISA statute is silent on the issue of exhaustion.

ERISA requires plans to offer fair and reasonable internal-review procedures for claims they deny. 29 U.S.C. § 1133(2). But the statute nowhere says claimants must take advantage of those procedures as a precondition to enforcing their rights in court.

Instead, the exhaustion doctrine is a judge-created doctrine that arose “in an era of unabashed purposivism,” and based on “policy judgments, legislative-history tea-reading, and an unexplained analogy to the Taft-Hartley Labor Management Relations Act.” However, despite what may have been good intentions, the concurrence pointed out:

It should bother us that such a ubiquitous doctrine, one that has thwarted many an employee’s efforts to enforce his benefit rights, rests on such shaky foundations. Maybe there are better arguments waiting to be made. But if there are, they’ve been waiting a long time.

While Judge Thapar acknowledged that plan terms may be drafted to require exhaustion, here they did not; and based on his reading of the policy,

it’s hard to see what would put an employee on notice that she could lose her benefit rights by failing to appeal the denial of her claim. Where both the statute and the plan documents are silent about any duty to exhaust, we should think twice about whether requiring exhaustion is legitimate.

Judge Thapar’s open questioning of established ERISA dogma is long overdue and may perhaps open the door to revisiting an even larger issue: Why do federal courts treat ERISA cases as administrative review actions when the statute plainly affords claimants the right to bring a civil action, a term of art?[7]

According to Federal Rule of Civil Procedure 2[8] and numerous U.S. Supreme Court cases, a civil action denotes a plenary action with the right to trial from the beginning.

The Supreme Court has issued a string of rulings[9] that have consistently made it clear that when Congress has authorized a litigant to bring a civil action, that party is entitled to a trial with witnesses rather than a record review proceeding. For example, the Supreme Court pronounced in Chandler v. Roudebush in 1976:

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.”[10]

Most recently in Kappos v. Hyatt in 2011, the Supreme Court reiterated that in the absence of statutory requirements imposing “evidentiary limits in district court findings” a district court “must make its own findings de novo” rather than act as a reviewing court as envisioned by the Administrative Procedures Act.[11]

The only provision in ERISA addressing litigation is Section 502,[12] which grants plan participants and their beneficiaries the right to bring a civil action to recover benefits. ERISA’s legislative history describes such actions as “regarded as arising under the laws of the United States in similar fashion to those brought under section 301 of the Labor-Management Relations Act of 1947.”[13]

Since Section 301 actions are plenary and even encompass jury trials, according to the Supreme Court’s 1990 ruling in Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry,[14] Judge Thapar and his colleagues may wish to expand their examination and begin a comprehensive inquiry into how and why ERISA litigation deviates so far from normal civil litigation.

In addition to looking into how ERISA cases came to be treated as quasi-administrative review claims, the courts need to look into and question another extrastatutory judge-created practice of remanding cases to plan administrators for reconsideration rather than adjudicating such matters to final judgment as Article III of the U.S. Constitution requires.

ERISA litigation is the only type of proceeding where courts remand cases to private actors in the same manner as they remand administrative agency cases — in the latter circumstance, courts possess statutory authority to remand;[15] however, no statutory provision provides for remands of ERISA cases.

ERISA litigation has taken on a unique character that markedly deviates from its governing legislation and from the Federal Rules of Civil Procedure. Judge Thapar’s skepticism about judicial policymaking in the absence of statutory authority and his willingness to take a fresh look at ERISA litigation fundamentals is both welcome and timely.

This article was originally published in Law 360.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 2020 WL 1522833 (6th Cir. March 31, 2020).

[2] A detailed examination of the court’s ruling may be found at https://www.law360.com/articles/1262044.

[3] The Federalist No. 78, at 523 (Alexander Hamilton) (J. Cooke ed., 1961).

[4] 29 U.S.C. § 1133.

[5] Denton v. First Natl. Bank of Waco , 765 F.2d 1295, 1300 (5th Cir. 1985); also see Amato v. Bernard , 618 F.2d 559, 568 (9th Cir. 1980).

[6] 29 U.S.C. § 1132(a)(1)(B) (ERISA § 502(a)(1)(B)).

[7] I have written extensively on this topic – See, DeBofsky, “A Critical Appraisal of the Current State of ERISA Civil Procedure – An Examination of How Courts Treat ‘Civil Actions” Brought Under the Employee Retirement Income Security Act,” 18 Empl. Rts. & Employ. Pol’y J. 203(2014).

[8] Rule 2 states, “There is one form of action – the civil action.”

[9] United States v. First City National Bank , 386 U.S. 361 (1967), Chandler v. Roudebush , 425 U.S. 840 (1976), and Kappos v. Hyatt , 564 U.S. 1036 (2011).

[10] Chandler, 425 U.S. at 862, n.37.

[11] Kappos, 536 U.S. at 438.

[12] 29 U.S.C. § 1132.

[13] H.R. Rep. No. 93-1280, at 5107 (1974) (Conf. Rep.).

[14] 494 U.S. 558 (1990).

[15] See, e.g., 42 U.S.C. § 405(g) – permitting remands of Social Security benefit claims to the Social Security Administration.

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Mark D. DeBofsky is a name partner of DeBofsky Sherman Casciari Reynolds P.C. — on the web at debofsky.com. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage issues. He can be reached at...