In Shane v. Albertson’s Inc., 2007 U.S.App.LEXIS 24092 (9th Cir. Oct. 15), Stacey Shane originally qualified for disability benefits under Albertson’s ERISA-governed disability income plan in 2000 on account of a knee injury; and benefits were paid continuously for two years. However, benefits were terminated in 2003 when the Albertson’s Medical Review Committee determined Shane no longer met the Plan’s definition of ”total disability.” A key issue before the court was whether the 1993 disability plan applied or whether the terms of a plan amendment effective in February 2002, which gave the MRC discretionary authority to determine eligibility, was applicable. The district court found the 1993 plan applied and applied the de novo standard to rule that Shane was entitled to benefits.

As to the question of which benefit plan applied, the court ruled the 1993 plan was applicable because, despite Albertson’s unquestionable authority to amend its plan, the 1993 plan contained the following limitation:

”Any amendment to the Plan shall be effective only with respect to Total Disabilities which commence on and after the effective date of the amendment. Total Disabilities commencing prior to the effective date of a Plan amendment are to be provided for under the terms of the Plan in effect at the time those disabilities commenced.”

Because Shane had qualified to receive ”total disability” benefits prior to the amendment, the court found that any changes introduced by the 2002 amendment did not apply to her claim. The court explicitly rejected Albertson’s argument which was based on Grosz-Salmon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1160-61 (9th Cir. 2001) and asserted, ”[i]t is well settled that the controlling plan is the plan in effect at the time of [sic] the final decision is made.” The 9th U.S. Circuit Court of Appeals distinguished Shane’s circumstances, however, finding that unlike the situation in Grosz-Salmon, clear language in the 1993 plan precluded amendatory terms from affecting her claim.

That did not end the discussion, though, since even the 1993 plan contained language granting discretionary authority to the Plan’s fiduciary, the Trustees, to evaluate claims. Had the Trustees made the claim decision, the arbitrary and capricious standard would have applied. But it was the MRC, not the Trustees, who terminated Shane’s benefits. The court thus framed the issue as ”whether the MRC properly received and was vested with the Trustees’ discretionary authority to review Shane’s LTD claim. If the MRC was not properly vested with such discretion, its decision to terminate Shane’s LTD benefits would not be subject to the deferential standard of review of abuse of discretion. See Jebian v. Hewlett-Packard Co. Employee Benefits Organization Income Protection, 349 F.3d 1098, 1105 (9th Cir. 2003)(‘When an unauthorized body that does not have fiduciary discretion to determine benefits eligibility renders such a decision … deferential review is not warranted.’) (quoting Sanford v. Harvard Indus., 262 F.3d 590, 597 (6th Cir. 2001)).”

The court found that while the Trustees had the power to delegate discretionary authority, they failed to do so in writing; and the court therefore ruled that the delegation was not properly made in accordance with the authority and requirements set forth in the plan. Thus, the judgment was affirmed.

A dissenting opinion by Judge Stephen Trott pointed out that 9th Circuit authority permitted oral delegation of discretionary authority so long as the plan did not explicitly require a written delegation; and the dissent cited deposition testimony that it believed satisfied that requirement. Hence, the dissent would have remanded the case.

This main focus of this ruling is consistent with the 2d Circuit’s decision in Gibbs v. CIGNA Corp., 440 F.3d 571 (2nd Cir. 2006) that subsequent amendments to benefit plans cannot take away rights established under a prior version of a benefit plan. Moreover, like the Grosz-Salmon ruling cited in the opinion, the benefit plan at issue in Hackett v. Xerox, 315 F.3d 771 (7th Cir. 2003), which held that the court examines the benefit plan in effect when the claim arises, and a claim does not arise in a disability benefit termination case until the benefits are terminated, this case is distinguishable because the benefit plan contained an explicit limitation on the power to amend.

Turning then to the other question of whether authority was properly delegated to the MRC, the dissenting opinion’s suggestion that an explicit written delegation may be unnecessary is somewhat puzzling since the ERISA law requires that the delegation be in writing. Section 402(a)(1) ERISA mandates: ”Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.” 29 U.S.C. §1102(a)(1) (emphasis added). The statute further requires that a ”named fiduciary” be explicitly identified. 29 U.S.C. §1102(a)(2). Also, while a delegation of fiduciary authority is permissible, the plan has to set forth an explicit manner of effecting the delegation. A leading example is Madden v. ITT Long Term Disability Plan, 914 F.2d 1279, 1283-84 (9th Cir. 1990), which explained that a discretionary standard of review may only be applied where (1) the ERISA plan expressly gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan and (2) pursuant to ERISA, 29 U.S.C. §1105(c)(1) (1988), a named fiduciary properly designates another fiduciary, delegating its discretionary authority.

In Madden, the court pointed to a specific written instrument delegating fiduciary authority to MetLife to administer claims. The informality of the process described inShane therefore appears contrary to the ERISA requirements which is why the majority found an oral delegation ineffective.

This issue is similar to the requirement that the discretionary language be written into a plan in a manner that is clear and unambiguous. Most recently, the 9th Circuit affirmed that requirement in Feibusch v. Integrated Device Technology Inc. Employee Benefit Plan, 463 F.3d 880 (9th Cir. 2006) and the 7th Circuit is equally insistent on an explicit writing both in Herzberger v. Standard Insur.Co., 205 F.3d 327 (7th Cir. 2000) and most recently in Patton v. MFS/Sun Life Financial Distributors Inc., 480 F.3d 478 (7th Cir. 2007). Thus, there is no reason for relaxing the delegation requirement in order to allow a party not explicitly clothed with discretion to ”pull a discretionary rabbit out of the hat,” to use the language of Herzberger.

This whole debate seems somewhat ridiculous, though. Obviously, both the district court and the court of appeals were persuaded that from a de novo perspective the plaintiff was entitled to benefits. Judge Kleinfeld’s concurrence in Abatie v. Alta Health & Life Insur.Co., 458 F.3d 955, 975 (9th Cir. 2006) is therefore worth revisiting, where he remarks:

”Discretion” is not just a means by which courts can easily get rid of complicated ERISA cases. What it means in practical affairs is that, if the administrator could reasonably decide either way, then it can decide against the claimant and there is no recourse. That means a lot of people who ought to get life insurance proceeds, disability benefits, or medical expense coverage will not get the coverage they should and, under a sounder reading of the evidence, would.

Thus, since, from an objective view of the evidence Shane was entitled to win, she ought to win; and it is time to put an end to the deferential standard of review of ERISA claims when, as Judge Kleinfeld points out, it can be misused to wrongfully deny life, health or disability benefits to deserving claimants.

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

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