Supreme Court Bolsters Continued Application of ERISA Discretion
Healthcare Law Alert
An administrator's exercise of discretion in ERISA plans, whether in making benefit decisions or interpreting plan terms, has come under increasing fire in recent years. Both states, which have attempted to eliminate discretionary clauses in ERISA plans, and certain courts such as the Ninth Circuit that take an increasingly cynical view of any exercise of discretion, have chipped away at the standard the U. S. Supreme Court announced in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). That Court, once again, has become the ERISA administrator's best friend, rendering a decision yesterday to reaffirm the historic application of ERISA discretion.
Conkright v. Frommert, 559 U.S. --, 2010 WL 1558979 (April 21, 2010), arose out of a pension-side dispute between a class of Xerox employees and the Xerox pension plan. However, the Court's holdings apply to welfare benefits as well. Employees who had left the company received lump sum distributions of retirement benefits, but were later rehired. The dispute concerned the manner in which the employees' past distributions figured into the calculation of their current pension benefits. The employees filed suit to challenge the plan's use of a "phantom account" method whereby present benefits were reduced by the past distribution and the gain that the distribution principal theoretically would have experienced if it remained in investment funds. Applying a discretionary standard of review to the administrator's interpretation, the district court granted summary judgment.
The Second Circuit vacated the summary judgment and remanded, finding the administrator's interpretation was unreasonable. On remand, the plan proposed to calculate the value of the past benefits by using a fixed percentage rate. This time, the district court did not apply a deferential standard of review, but rather imposed its own calculation that simply deducted from present benefits the amount of the past distributions without any consideration for the time value of money. The Second Circuit affirmed, and the Supreme Court granted certiorari. The Supreme Court ultimately held that the administrator should not have been stripped of his discretion despite his initially incorrect interpretation, and the High Court rejected the "one strike and you're out" approach to review of administrator decisions.
The Conkright opinion has three principal determinations that are extremely helpful to administrators in both the pension and the welfare benefit arenas. First, the Court affirmed the continued application of discretionary review, particularly important given the state and circuit court disdain for the standard. It affirmed Firestone's continued validity, as ERISA administrators operating under a plan containing a discretionary clause are accorded discretionary authority to determine eligibility for benefits and construe the terms of the plan. The Court cited Metropolitan Life Ins. Co. v. Glenn, 554 U.S. – (2008), and confirmed that a deferential standard of review remains appropriate even in the face of a conflict of interest, i.e., when the administrator both determines eligibility for benefits and pays those benefits itself. Most importantly, the Court confirmed that applying a deferential standard of review means that the administrator's interpretation of the plan will not be disturbed if reasonable. This new decision precludes courts from trying to use Glenn to apply something other than a discretionary review standard to benefit-decision challenges.
Second, the Court reiterated its rejection of any sort of special procedural rule that would further complicate or add time and expense to the ERISA adjudication process. Following this principle, the Supreme Court rejected a rule that would strip an administrator of discretion due to a prior "mistake" or abuse of its discretion. The Court held that if a systemic conflict of interest does not strip a plan administrator of deference, as Glenn held, there is no reason why a prior mistake should strip such deference. The Court's holding does not mean an administrator could never lose discretion. Under the facts presented, however, there was no finding that the administrator had acted in bad faith or would not fairly exercise discretion to interpret the terms of the plan despite the prior "mistake."
Third, the Court repeated some of the favorable ERISA policies that administrators frequently reference. For example, since Congress did not require employers to establish benefit plans, there must be a careful balancing between ensuring fair and prompt enforcement of rights and the encouragement of plan creation. The Court also recognized the importance of a system that is not so complex that administrative costs or litigation expenses discourage employers from offering plans. And it noted that the importance of assuring a predictable set of liabilities under uniform standards is protected by affording deference and primary interpretative authority over a plan to the administrator. Lastly, the Court mentioned the interest in uniformity and avoiding a patchwork of different interpretations of plans that would result in inefficiency and reduction of benefits.
The U.S. Supreme Court, therefore, continues to be the primary predictable champion of ERISA efficiency by upholding the original policies of ERISA. Conkright should be cited in all circumstances in which discretionary plan benefit decisions and interpretations are challenged.