Fee awards made pursuant to the Employee Retirement Income Security Act’s (ERISA) fee-shifting statutory provision (29 U.S.C. Section 1132(g)) are a critical part of ERISA litigation.

A ruling last month from the 2nd U.S. Circuit Court of Appeals, Donachie v. Liberty Life Assurance Co. of Boston, 2014 U.S.App.LEXIS 4593 (2nd Cir. March 11, 2014), clarified the limits of a lower court’s discretion in determining whether to award fees, finding the district court had abused its discretion by imposing a “bad faith” standard.

Although the plaintiff, John Donachie, was awarded summary judgment in his dispute over disability benefits, the U.S. District Court denied his request for attorney fees. The 2nd Circuit affirmed the award of benefits but concluded that the district court abused its discretion in denying fees by failing to identify a “particular justification” for the fee denial.

Donachie’s disability arose after he underwent replacement of a heart valve with a prosthetic. Although the valve replacement was successful, the noise generated by the prosthetic valve caused Donachie to experience severe anxiety and depression that rendered him unable to work. Although Liberty denied the ensuing claim for disability benefits, both the district court and court of appeals found the denial was arbitrary and capricious and ordered Liberty to pay benefits.

The district court refused to award fees, however, based on a finding that the plaintiff “failed to show any bad faith by Liberty’s administrator in making its LTD [long-term disability] benefits determination.” Although the court of appeals acknowledged the district judge’s broad discretion in awarding fees, the court also noted the policy behind ERISA’s fee-shifting provision, which is intended to encourage the vindication of the rights conferred by ERISA.

Based on the U.S. Supreme Court’s ruling in Hardt v. Reliance Standard Life Insurance Co., 560 U.S. 242 (2010), a fee award is justified so long as the claimant has shown “some degree of success on the merits.” The 2nd Circuit thus concluded that the Hardt standard is the “sole factor” a court must consider when deciding whether to award fees. However, both the Supreme Court and 2nd Circuit left open the possibility of taking into consideration the five factors courts had previously used:

1) The degree of opposing parties’ culpability or bad faith; 2) ability of opposing parties to satisfy an award of attorney fees; 3) whether an award of attorney fees against the opposing parties would deter other persons acting under similar circumstances; 4) whether the parties requesting attorney fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA itself; and 5) the relative merits of the parties’ positions. Hardt, 560 U.S. at 249 n.1.

Looking to the facts of this case, the court determined that, as the prevailing party, Donachie was eligible to receive an award of fees. The court cited prior precedent in ruling that “a party need not prove that the offending party acted in bad faith in order to be entitled to attorney fees.” (citing Slupinski v. First Unum Life Insurance Co.,554 F.3d 38, 47, 48 (2d Cir. 2009)).

The court explained that instead of bad faith, the district court should have recognized that “the concepts of ‘bad faith’ and ‘culpability’ are distinct, and either one may satisfy the first … factor.” Citing Locher v. Unum Life Insurance Company of America, 389 F.3d 288, 298-99 (2d Cir. 2004), the court further noted that culpability was found from an insurer’s summary rejection of evidence and its reliance on “general assumptions,” which was similar to what Liberty had done in this matter.

In addition to failing to address culpability, the 2nd Circuit also faulted the district court for its failure to address the “relative merits” of the parties’ positions. Since summary judgment was granted to the plaintiff, that factor clearly favored an award of fees. Nor was there any other particular justification evident to the court of appeals that militated against an award of fees.

Fee awards are an essential component of ERISA. Although the benefit amounts at issue may be relatively small, the rights at stake are often of paramount significance.

That point was driven home by Anderson v. AB Painting & Sandblasting Inc., 578 F.3d 542, 545 (7th Cir. 2009), where the court acknowledged that fee awards redress “petty tyranny” and encourage attorneys to pursue claims involving wrongful denial of employee benefits regardless of the amount in controversy: “That is the whole point of fee-shifting – it allows plaintiffs to bring those types of cases because it makes no difference to an attorney whether she receives $20,000 for pursuing a $10,000 claim or $20,000 for pursuing a $100,000 claim.”

Moreover, the 7th Circuit, like the 2nd Circuit in this case, has rejected the idea that fee awards are appropriate only in cases involving “bad faith.” In Production & Maintenance Employees’ Local 504, Laborers’ International Union v. Roadmaster Corp., 954 F.2d 1397, 1405 (7th Cir. 1992), the court observed:

“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.”

Instead of looking to the standard of insurance bad faith, a finding that an insurer or plan administrator acted arbitrarily in denying benefits should be enough to convince a court that a fee award is justified.

This article was initially published in the Chicago Daily Law Bulletin.

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