ERISA Litigation Newsletter

In Edmonson v. Lincoln National Life Insurance Company, No. 12-1581, 2013 WL 4007553 (Aug. 7, 2013), the U.S. Court of Appeals for the Third Circuit affirmed summary judgment for the defendant insurance company in one of the many cases challenging the use in group insurance benefit plans of retained asset accounts.

Background

The litigation was brought by a beneficiary of a group life insurance plan whose sponsor had purchased group life insurance contracts from the insurer defendant.  The insurer paid benefit claims under the group contract through interest-bearing accounts backed by funds that the insurer retained until the account holders wrote checks or drafts against the account.  The plaintiff challenged the practice, which she claimed constituted a breach of fiduciary duty and a prohibited transaction under ERISA.  The plaintiff purported to sue on behalf of a class of beneficiaries under contracts issued by the insurer defendant who had received their benefits through a retained asset account.

District and Appeals Court Decisions in Edmonson

In February 2012, the U.S. District Court for the Eastern District of Pennsylvania entered an order granting judgment to the defendant on the grounds that assets backing the retained asset accounts were not plan assets and the defendant was not acting as an ERISA fiduciary with respect to the plan. 

On appeal, the Third Circuit ruled in favor of the defendant, albeit on somewhat different grounds.  With respect to the plaintiff’s claim that the defendant exercised fiduciary discretion in selecting the method of claims payment, the court held the insurer to be an ERISA fiduciary with respect to plan administration and management because the plan at issue permitted the insurer “some leeway” to decide how claims would be paid, and therefore conferred discretion upon it.

The court also held that the insurer’s selection of the method of claims payment involved exercising authority or control over a plan asset – the policy.  However, while the court held the insurer to fiduciary standards with respect to its selection of the method of payment, the court nonetheless concluded that the insurer did not breach its fiduciary duty of loyalty when it chose to settle claims via retained asset accounts because such accounts are not inconsistent with the beneficiary’s interests and the insurer’s potential to profit was “wholly dependent” on the beneficiaries’ actions.  The court noted that ERISA does not mandate nor preclude any specific mode of payment. 

Fiduciary Status and Standing

With respect to the plaintiff’s claim concerning the defendant’s investment of retained assets, the court held that the defendant was not a fiduciary with respect to that conduct because retained assets are not ERISA plan assets. 

In addition to its fiduciary analysis, the court also addressed issues of constitutional and statutory standing, ruling that the plaintiff had both constitutional and statutory standing to assert her claims in light of her allegations that (i) she suffered an alleged injury in fact with respect to any difference between the defendant’s investment earnings on retained assets and the crediting rate paid on retained asset accounts; (ii) her alleged injury was traceable to the defendant’s decision to settle benefit claims via retained asset accounts; and (iii) ERISA’s equitable relief provision afforded her a claim for disgorgement of ill-gotten profits.

One member of the three-judge panel expressed disagreement with these standing rulings in an opinion that dissented from that portion of the majority opinion, but otherwise joined the majority in affirming judgment for the defendant.  With respect to whether the plaintiff suffered any actual injury, in affirming judgment for the defendant on the merits, the court concluded “[p]ayment via the retained asset account, by itself, caused [the plaintiff] no injury,” because the plaintiff “could have … withdraw[n]” the funds from the account at any time.

In Pipefitters Local 636 Insurance Fund v. Blue Cross and Blue Shield of Michigan, No. 12-2265, 2013 WL 3746217 (July 18, 2013), the U.S. Court of Appeals for the Sixth Circuit held that an entity providing services to a plan acts as an ERISA fiduciary where it exercises discretion to determine and assess a fee paid by the plan to the service provider.

Background

In Pipefitters, a self-funded health plan entered into an administrative services contract (“ASC”) with Blue Cross and Blue Shield of Michigan (“BCBSM”), under which BCBSM would provide certain services to the plan and the plan would be responsible for paying benefit claims and specified fees.  The ASC also provided that “any cost transfer subsidies . . . ordered by [the relevant state insurance commission] will be reflected in the hospital claims cost” payable by the plan.

Under applicable state law, BCBSM was required to pay 1% of its revenues to the state to subsidize the cost of health care to senior citizens in the state receiving “Medigap” coverage (the “Medigap Obligation”), but state law did not prescribe the method by which BCBSM was to satisfy this Medigap Obligation.

During the first 18 months that the ASC was in effect, BCBSM undertook to obtain funds to satisfy the Medigap Obligation by, in effect, charging and retaining 1% of the cost of benefit claims it paid on behalf of the plan, with the amount retained referred to as the “OTG Fee.”  (For example, on a $100 claim, BCBSM would charge the plan $101, pay the health care provider $100, and retain $1 as an OTG Fee to pay the Medigap Obligation.)  After 18 months, BCBSM unilaterally decided to stop charging the OTG Fee. 

District and Appeals Court Decisions in Pipefitters

The Pipefitters plan sued BCBSM, asserting that BCBSM acted as an ERISA fiduciary in determining and assessing the OTG Fee.  The plan argued that, in causing the plan to pay the OTG Fee, BCBSM had breached its fiduciary duties of prudence and loyalty and had engaged in prohibited self-dealing.  After the district court granted summary judgment for the plan, BCBSM appealed.

The Sixth Circuit affirmed in a unanimous decision.  The court noted that while state law imposed the Medigap Obligation on BCBSM, the method of obtaining funds to pay that obligation was left to the discretion of BCBSM.  The court rejected BCBSM’s argument that the method BCBSM decided to use – the OTG Fee – was compelled by the terms of the ASC which provided that state-required “cost transfer subsidies” would be reflected in the costs of claims paid by the plan. 

The court emphasized that BCBSM had not assessed the OTG Fee against all of its self-funded plan customers, and had unilaterally decided to stop assessing the fee against the Pipefitters plan.  Because its discretionary assessment of the fee against the plan benefitted BCBSM (by helping it to fund its Medigap Obligation), the court concluded that BCBSM had breached its fiduciary duties under ERISA. 

On August 7, 2013, the U.S. Court of Appeals for the Seventh Circuit took what it called “the next step” in its analysis of when a class may be certified in a case alleging breach of ERISA fiduciary duties with respect to a defined contribution plan, after it first addressed the question in its January 2011 decision, Spano v. Boeing Co., reported in Goodwin Procter’s March 30, 2011 ERISA Litigation Update.  In Abbott v. Lockheed Martin Corporation, No. 12-3736, 2013 WL 4010226, a panel comprised of the same judges who decided the Spano case reversed denial of a class that was “more focused” than the one it rejected in Spano, and remanded the case to the trial court, allowing a class of 401(k) participants who invested in a single fund available under their plan to proceed to trial. 

Background

Abbott is one of many cases challenging the fees associated with 401(k) plan investments.  Through a number of previous rulings, the district court had narrowed the case down to three claims:  (i) the administrative fees paid by the plan were excessive; (ii) the stable value fund investment option was imprudently managed resulting in underperformance, and (iii) the company stock fund investment option was imprudently managed due to allegedly excessive fees and a high level of cash held in the fund.  The trial court had once before certified a class, though the decision had been remanded by the Seventh Circuit in 2011 based on Spano v. Boeing.  After Spano, the trial court again ruled on class certification, with one of the classes it declined to certify receiving interlocutory review by the Seventh Circuit.

The Trial Court Decision as to the Challenged Class

After remand, the trial court certified two classes, one with respect to the administrative fee claim and a second with respect to the stock fund.  However, it declined to certify a third class of participants who invested in the stable value fund during a six-year period when the fund underperformed relative to a specified index.  The court below had held that, in attempting to navigate the Seventh Circuit’s earlier Spano decision, the plaintiffs created a fatal issue – asking the court to use the class certification mechanism to “backdoor” the contested question of underperformance with their chosen benchmark.  Because the trial court had not ruled substantively on whether such alleged underperformance constituted any breach of duty, it declined to certify the stable value class. 

In its decision, the Seventh Circuit addressed only the stable value proposed class.

The Seventh Circuit Finds That Certification Was Appropriate

Preliminary to its discussion of class certification, the Seventh Circuit rejected the defendants’ challenge to the constitutional standing of the sole named plaintiff who was invested in the stable value fund – and whose account outperformed the index he selected – holding that there could be harm aside from underperformance with the index. 

Turning to the class issues, the appellate court held that simply allowing a class definition that makes reference to underperformance of a fund to an index is not tantamount to accepting that the index is the proper measure of harm or breach.  The court observed that the class definition is simply a “tool of case management” and does not, as defendants contended, “sneak into the case a theory of liability that was rejected at summary judgment.”

The court went on to explain why certification of the single, stable value fund class was consistent with Spano.  It explained that the class in Spano was not limited to a single fund and, indeed, it was not apparent from the complaint in Spano which fund(s) were challenged “or why.”  The Seventh Circuit explained that Spano stood for the proposition that a combination of a broad class and vague claims would inevitably create “intra-class conflict of the sort that defeats both typicality and adequacy-of-representation requirements” of the Federal Rules of Civil Procedure 23(a).  It found, by contrast, that the class in Abbott was “considerably narrower than those at issue in Spano” and that the nature of stable value funds were such that there was little risk that some investors would reap a windfall by mismanagement such that a conflict would exist for a class comprised solely of investors in a stable value fund.

Postscript on Spano

On September 19, 2013, six weeks after Abbott was decided by the Seventh Circuit, the district court in Spano granted in part the plaintiffs’ amended motion for class certification, and certified a class and four sub-classes.  The class was comprised, again, of all plan participants, but was limited to a six-year period and specified that all participants paid recordkeeping fees.  One subclass was comprised of participants in all mutual funds during that period under the theory that every fund was “laden with imprudently excessive fees,” and the three remaining sub-classes corresponded to individual fund choices for specified periods of time.

On Tuesday, October 29, 2013, from 12:00 – 1:00 p.m. EDT, Goodwin Procter partners Jamie Fleckner and Alison Douglass will host a complimentary webinar on the fiduciary issues facing service providers in light of the appellate decisions discussed in this edition of the ERISA Litigation Update.  Please register to attend this webinar discussion.

Goodwin Procter partner Jamie Fleckner will speak at the following upcoming conferences:

American Conference Institute’s 6th Annual ERISA Litigation Conference
October 24, 2013
New York, NY

Thomson Reuters 26th Annual ERISA Litigation Conference
December 4, 2013
New York, NY