Employee benefit claimants are frequently surprised by the limited remedies to them under the Employee Retirement Income Security Act. However, a recent U.S. Supreme Court ruling in Liu v. U.S. Securities and Exchange Commission,[1] might open the door to additional remedies.

Although many ERISA claims involve benefits provided under disability, life insurance policies, traditional insurance remedies that include extracontractual damages for bad faith claim handling are disallowed.

The seminal Supreme Court ruling in Pilot Life Insurance Company v. Dedeaux in 1987[2] firmly established that such claims are preempted by ERISA because they conflict with the specific remedies enumerated in ERISA Section 502(a),[3] the statutory provision establishing the civil enforcement regime established by Congress to redress statutory violations.

The court justified constraining available remedies by characterizing Section 502(a) as “a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans.”[4]

A few years after Pilot Life, though, a federal judge for the U.S. District Court for the Central District of California wrote about the inadequacy of ERISA’s remedies in Dishman v. Unum Life Insurance Company of America,[5] observing:

This case reveals that for benefit plans funded and administered by insurance companies, there is no practical or legal deterrent to unscrupulous claims practices. Absent such deterrents, the bad faith denial of large claims, as a strategy for settling them for substantially less than the amount owed, may well become a common practice of insurance companies. … It is still the Court’s view that bad faith tort liability under state law is so extreme and unpredictable that it would detrimentally disturb the ERISA balance. However, without any statutory or other legal deterrent it is entirely predictable that insurers will go overboard to minimize claims.[6]

Now, more than 30 years after Pilot Life and nearly 25 years after Dishman, the same issues continue to frustrate claimants whose claims have been wrongfully denied.

A possible solution, at least in part, was offered by the U.S. Court of Appeals for the Sixth Circuit in 2013 in Rochow v. Life Insurance Company of North America,[7] where the court found the equitable remedy of disgorgement of profits was available as other appropriate equitable relief under ERISA Section 502(a)(3)[8] that could be awarded in addition to the benefits due under the terms of the plan pursuant to ERISA Section 502(a)(1)(B).[9]

The court pointed out that such a remedy does not lead to double compensation or punishment of the wrongdoer because “it leaves [the insurance company] no worse off than it would have been had it paid benefits to Rochow when they were due as the law required.”[10]

The court approved a disgorgement remedy equal to the return on equity achieved by the insurer between the date benefits were due and when they were finally awarded by the court. It expressed the principle at stake as “if you take my money and make money with it, your profit belongs to me.”[11]

Alas, the victory for the plaintiffs was short-lived. The Sixth Circuit granted rehearing in Rochow and issued a new ruling the Supreme Court declined to review.[12] A majority of the circuit judges hearing the case en banc concluded the ERISA statute does not permit a claim for breach of fiduciary duty that addresses the same conduct remedied by a claim for benefits brought under ERISA Section 502(a)(1)(B).

The court held:

A claimant can pursue a breach-of-fiduciary-duty claim under § 502(a)(3), irrespective of the degree of success obtained on a claim for recovery of benefits under § 502(a)(1)(B), only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate.[13]

The court added that “‘other appropriate equitable relief’ is not necessary to make [Rochow] whole.”[14] Whether it is true that an award of benefit due is enough to make a claimant whole where the claimant is deprived of money owed for years while the insurance company profitably invested those funds, since the issuance of the en banc Rochow decision, no court has ordered a disgorgement of profits remedy.

However, there may be reason to believe the issue is not dead and buried. One of the last cases decided this term by the Supreme Court, Liu v. SEC, addressed the issue of disgorgement of profits as equitable relief available to the SEC.

Such a remedy was found encompassed by a statute reading:

In any action or proceeding brought or instituted by the [Securities and Exchange] Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.[15]

Like Section 502(a)(3) of ERISA, which permits a benefit claimant to bring an action “to obtain other appropriate equitable relief,” the Securities Exchange Act also lacks a definition of the meaning of equitable relief.

Liu v. SEC involved a securities fraud claim perpetrated by Charles Liu and his wife Xin Wang involving an offering memorandum directed at foreign investors who ultimately invested nearly $27 million to build a cancer treatment center. However, most of the money raised was diverted to Liu’s personal account and a company under Wang’s control.

The SEC brought a civil action against Liu and Wang alleging misappropriation of millions of dollars. The court entered an order requiring disgorgement of the amounts raised from the investors less approximately $250,000 that remained in the project’s corporate account.

In fleshing out the contours of the meaning of “equitable relief” under securities law, the court turned to its ERISA jurisprudence involving a series of cases dating back to the 1990s.[16] The court distilled the holdings in those cases into two guiding principles:

First, equity practice long authorized courts to strip wrongdoers of their ill-gotten gains, with scholars and courts using various labels for the remedy. Second, to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.[17]

The court also looked to several well-established legal references[18] that have substituted the term “disgorgement” in place of “restitution,” albeit with the same meaning; i.e., the remedy is measured by the defendant’s wrongful gain and requires disgorgement of that gain. The court was careful to circumscribe the remedy, however.

To maintain the equitable character of such relief and preclude it from turning into a penalty, the remedy of disgorgement is limited to net profits from wrongdoing after deduction of legitimate business expenses.

It is hard to square the Liu ruling with the second Rochow ruling, which stripped the plaintiff of a disgorgement remedy.

Imagine the following situation: A claimant requiring an organ transplant is refused reimbursement by her health insurer. The claimant then borrows money from a bank to pay for the procedure, which saves the claimant’s life.

Meanwhile, the insurer invests the money it would have paid had it approved the treatment. While the claimant may later successfully sue to challenge the benefit denial and recover the cost of the treatment, the claimant is not made whole due to the interest charges on the bank loan.

Under Liu’s interpretation of disgorgement as an equitable remedy, the profits earned by the health insurer less investment expenses need to be paid to the claimant in addition to the cost of the treatment in order to make the claimant whole for the charges relating to the bank loan.

ERISA was intended to afford participants in employee benefit plans and their beneficiaries more protection than they had prior to the law’s passage.[19] However, when an insured benefit is subject to ERISA, it is ironic that claimants lose many of the rights they would have possessed under state insurance law due to the federal law’s broad preemptive reach.

It is insufficient recompense, as the Dishman court found, that claimants can recover fees and a small amount of prejudgment interest when the wrongful deprivation of benefits causes serious harm, although even a disgorgement of profits remedy would not address physical harm or even death resulting from a wrongful benefit denial.[20]

Since the data presented in the initial Rochow ruling revealed that the defendant’s annual return on equity exceeded 20%, absent a disgorgement remedy, ERISA plan administrators have a greater incentive to deny claims than to pay them.

Mark DeBofsky is a shareholder at DeBofsky Law.

This article was originally published in Law 360 https://www.law360.com/articles/1291478

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 U.S. LEXIS 3374 (June 22, 2020).

[2] 481 U.S. 41; 107 S. Ct. 1549; 95 L. Ed. 2d 39 (1987).

[3] 29 U.S.C. § 1132(a).

[4] 481 U.S. at 52.

[5] CASE NO. 96-0015 JSL ,1997 U.S. Dist. LEXIS 22676 (C.D. Cal. May 9, 1997).

[6] Id. at *28-36.

[7] 737 F.3d 415 (6th Cir. 2013).

[8] 29 U.S.C. § 1132(a)(3).

[9] 29 U.S.C. § 1132(a)(1)(B).

[10] 737 F.3d at 425.

[11] 737 F.3d at 429 (quoting Nickel v. Bank of America , 290 F.3d 1134, 1138 (9th Cir. 2002)).

[12] 780 F.3d 364 (6th Cir.); cert. denied 136 S.Ct. 480, 193 L.Ed.2d 350 (2015).

[13] 780 F.3d at 372.

[14] 780 F.3d at 375.

[15] 15 U.S.C. § 78u(d)(5).

[16] See, e.g., Mertens v. Hewitt Associates , 508 U. S. 248, 256, 113 S. Ct. 2063, 124 L. Ed. 2d 161 (1993); Great-West Life & Annuity Ins. Co. v. Knudson , 534 U. S. 204, 217, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002); CIGNA Corp. v. Amara , 563 U. S. 421, 439, 131 S. Ct. 1866, 179 L. Ed. 2d 843 (2011); and Montanile v. Board of Trustees of Nat. Elevator Industry Health Benefit Plan , 577 U. S. 136, 142, 136 S. Ct. 651, 193 L. Ed. 2d 556 (2016).

[17] 2020 U.S. LEXIS 3374 at *11 – *12.

[18] 1 D. Dobbs, Law of Remedies §4.3(5), p. 611 (1993) (“Accounting holds the defendant liable for his profits”), with id., §4.1(1), at 555 (referring to “restitution” as the relief that “measures the remedy by the defendant’s gain and seeks to force disgorgement of that gain”); see also Restatement (Third) of Restitution and Unjust Enrichment §51, Comment a, p. 204 (2010) (Restatement (Third)) (“Restitution measured by the defendant’s wrongful gain is frequently called ‘disgorgement.’ Other cases refer to an ‘accounting’ or an ‘accounting for profits'”); 1 J. Pomeroy, Equity Jurisprudence §101, p. 112 (4th ed. 1918) (describing an accounting as an equitable remedy for the violation of strictly legal primary rights).

[19] 29 U.S.C. § 1001(b).

[20] See, e.g., Andrews-Clarke v. Travelers Ins. Co. , 984 F.Supp.49 (D.Mass. 1997) (denying a remedy for wrongful death for improper rejection of health insurance benefit claim).

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