Supreme Court Rules that Litigant Need Not Be Prevailing Party to Recover Attorney's Fees Under ERISA
Healthcare Law Alert
On May 24, 2010, the U.S. Supreme Court handed down its decision in Hardt v. Reliance Standard Insurance Company, No. 09-448, opening the proverbial floodgates to an increase in ERISA attorney’s fee claims. Specifically, the Court ruled that a litigant need not be a “prevailing party” in order to recover attorney’s fees under ERISA §502(g)(1), 29 U.S.C. §1132(g)(1) (ERISA’s fee-shifting statute). Id. at p. 1. The Court also ruled, however, that the party seeking fees must have “achieved ‘some degree of success on the merits’” in order to be eligible for a fee award, and that once a party satisfies this threshold inquiry, the district court has the discretion to determine the amount of fees to award. Id.
In Hardt, the defendant insurer/claims administrator denied the plaintiff’s claim for long-term disability (LTD) benefits under an ERISA regulated employee welfare benefit plan and upheld that decision on administrative appeal. The plaintiff filed a lawsuit in the U.S. District Court for the Eastern District of Virginia challenging that determination pursuant to ERISA §502(a)(1)(B). The district court found that the defendant, who was vested with discretionary authority, had not considered all of the evidence the plaintiff submitted in support of her claim, and consequently found the decision denying benefits to be arbitrary and capricious. The Court also noted that while it was close to directing that judgment be entered for the plaintiff, it would instead order that the matter be remanded to the plan for further consideration and with specific instructions to consider the evidence it had previously overlooked. On remand, the defendant reversed its initial decision and approved the plaintiff’s benefit claim. The plaintiff then moved for an order awarding her attorney’s fees under ERISA §502(g)(1), 29 U.S.C. §1132(g)(1), which the district court granted, finding that the plaintiff was a “prevailing party.”
On appeal, the Fourth Circuit Court of Appeals reversed the district court’s award of attorney’s fees, holding that ERISA §502(g)(1) requires that in order to be eligible for an attorney’s fee award, a party must demonstrate that she is a “prevailing party” and that an order remanding the claim for further consideration is not sufficient to establish that status because the final result following a remand may still be a denial of benefits. The Fourth Circuit’s ruling was consistent with those of the First, Seventh and 10th Circuits, which had all held that an ERISA attorney’s fee award was contingent upon a showing that the party requesting the award is a “prevailing party.” The Second, Fifth and 11th Circuits had all held that a party need not show that it was a “prevailing party” in order to be eligible for a fee award under ERISA §502(g)(1). Therefore, the Supreme Court’s decision in Hardt resolved this circuit split.
In Hardt, the Supreme Court first interpreted ERISA §502(g)(1) in connection with other fee shifting statutes. It found that ERISA §502(g)(1) provides that “the court in its discretion may allow a reasonable attorney’s fee and costs of action to either party” and does not include any requirement that the requesting party be a “prevailing party.” In contrast, the Court noted that ERISA §502(g)(2) limits an award of fees to a party who obtains a judgment in favor of the plan. Based on the lack of similar language in ERISA §502(g)(1), the Court found that a party need not be the “prevailing party” in order to recover attorney’s fees under this section and reversed the Fourth Circuit’s decision.
In making this ruling, the Supreme Court cautioned that awarding attorney’s fees to a party that failed to obtain “some degree of success on the merits” would be an abuse of discretion. The Court explained that “trivial success on the merits” or a “purely procedural victory” are not sufficient to justify an award attorney’s fees. The Court based its ruling on its prior decision in Ruckelshaus v. Sierra Club, 563 U.S. 680 (1983). In that case, the Court observed that fee shifting statutes are in derogation of the so-called “American rule,” which holds that each party pays its own attorney’s fees, regardless of who ultimately prevails in the litigation. Accordingly, these statutes must not be interpreted in a way that expands their scope beyond the explicit text. In Ruckelshaus the Court found that where Congress did not affirmatively demonstrate an intent to abandon the American rule in its entirety by including words to that effect in a fee shifting statute, awarding attorney’s fees to a party who did not achieve any success on the merits would be contrary to general notions of fairness.
The Supreme Court also took the opportunity to note that the five-factor test applied by most courts when considering ERISA fee award applications “bear[s] no obvious relation to §1132(g)(1)’s text or to our fee shifting jurisprudence,” and therefore, a reviewing court need not apply it in deciding whether to award attorney’s fees. These factors are: (1) the degree of opposing parties’ culpability or bad faith; (2) ability of opposing parties to satisfy an award of attorney’s fees; (3) whether an award of attorney’s fees against the opposing party would deter other persons acting under similar circumstances; (4) whether the parties requesting attorney’s 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. (p. 6, n. 1). However, the Court did not foreclose a district court from considering these factors after a litigant has already made a threshold showing of entitlement to attorney’s fees under ERISA.
The Hardt decision will undoubtedly result in an increase in the number of fee applications made by claimants – including those claimants who were not awarded benefits by the Court. Such litigants will likely argue that any remand, regardless of any evidence of bad faith on the part of the claims administrator, requires an award of fees. Nevertheless, the Court expressly stated that it did not find that “a remand order, without more constitutes ‘some success on the merits’ sufficient to make a party eligible for attorney’s fees under §1132(g)(1).” (p. 13). Accordingly, the Court’s decision in Hardt does not mandate an award of attorney’s fees with every remand order, but as a practical matter, it will be hard to argue that such a result, along with some additional showing by the claimant (i.e. the “five-factor test”), does not constitute “some degree of success on the merits.”