ERISA Litigation Newsletter June 27, 2013
In This Issue

In McCutchen, Supreme Court Vacates and Remands Case Concerning Enforcement of Plan Reimbursement Provision

Summary

The U.S. Supreme Court ruled that a participant who receives medical payments from an ERISA health benefit plan may not avoid the reimbursement requirements of that plan by arguing that such reimbursement is "inequitable." The Court also found, where a plan is silent on attorney’s fees, equitable principles could inform how fees should be allocated among the parties.

In U.S. Airways, Inc. v. McCutchen, No. 11-1285 (Apr. 16, 2013), the U.S. Supreme Court vacated judgment and remanded the case in a matter seeking to enforce a reimbursement provision in a health benefit plan.

Background

The case involved a self-funded group health plan. The plan provided coverage for medical expenses that were not covered by a third party. Under the plan, if benefits were paid on a claim resulting from the actions of a third party, the participant would be required to reimburse the plan for amounts paid for claims out of any monies recovered from any third party (including an insurer).

McCutchen was injured in a car accident caused by another driver. The plan paid $66,866 in healthcare benefits in connection with McCutchen’s injuries. McCutchen pursued claims against his automobile insurer and the other driver and ultimately recovered $110,000 by way of settlement. After attorney’s fees, McCutchen recovered $66,000. The employer demanded reimbursement of 100% of the benefits paid under the plan. When McCutchen refused, the employer brought suit under ERISA § 502(a)(3), seeking equitable relief in the form of a lien on the $66,866 it demanded.

District and Appeals Court Decisions in McCutchen

The U.S. District Court for the Western District of Pennsylvania found for the employer on the ground that the plan "clear[ly] and unambiguous[ly]" provided for full reimbursement of medical expenses paid, and ordered McCutchen to pay the employer $66,866.

On appeal, the Third Circuit vacated. Reasoning that traditional "equitable doctrines and defenses" applied to § 502(a)(3) suits, the Third Circuit held that the principle of unjust enrichment overrode the plan’s reimbursement provision because it would be a windfall for the employer to recover its entire lien amount without paying a share of attorney’s fees. The appeals court stated that Congress’s use of the term "appropriate equitable relief" in the statute was intended to allow defenses typically available in equity, such as unjust enrichment.

Equitable Defense vs. ERISA Plan Reimbursement

The Supreme Court granted certiorari to resolve a circuit split on whether equitable defenses can override an ERISA plan’s reimbursement provision. The Court vacated the Third Circuit’s decision, ruling that a participant who receives medical payments for an injury pursuant to an ERISA health benefit plan may not avoid the reimbursement requirements of that plan by arguing that such reimbursement is "inequitable."

In so ruling, the Court pointed to its decision in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006), in which the Court permitted a health plan administrator to bring suit under § 502(a)(3) to enforce a reimbursement clause. The Court held that, under Sereboff, the equitable doctrine of unjust enrichment could not override the terms of the plan, which afforded the employer an "equitable lien by agreement" on amounts recovered by the participant from a third party.

The Court stated that enforcing such a lien means holding the parties to their mutual promises and declining to apply equitable principles that are at odds with the parties’ expressed commitments. Rejecting McCutchen’s argument that § 502(a)(3) authorizes broad equitable relief, the Court held that the statute does not "authorize ‘appropriate equitable relief’ at large," but provides only such relief as will enforce "the terms of the plan" or the statute.

Nonetheless, while the Court held that equitable principles could not trump the plan’s reimbursement provision, it also concluded that – where the plan was silent on the allocation of attorney’s fees – equitable principles could inform how attorney’s fees expended by McCutchen should be allocated among the parties. Accordingly, the Court remanded the case for further proceedings on the attorney’s fee issue.

In Leimkuehler, Seventh Circuit Affirms Judgment for Insurer in Challenge to Use of Separate Accounts in 401(k) Platform

Summary

Creating and offering a menu of funds to retirement plan trustees does not confer ERISA fiduciary status, according to a decision by the Seventh Circuit. The court held that ERISA's fiduciary status analysis is not altered by an insurer establishing separate accounts to hold specified mutual funds. And while an insurer can, in certain circumstances, be an ERISA fiduciary with respect to the operation of separate accounts, the court said, it is only liable if the accounts are mismanaged.

In Leimkuehler v. Am. United Life Ins. Co., Nos. 12-1081, 12-1213, & 12-2536 (Apr. 16, 2013), the Seventh Circuit affirmed dismissal, on summary judgment, of all claims against an insurer concerning the investment options offered to a retirement plan on a platform structured through separate accounts within group annuity contracts sold to the plan’s trustees.

Background

The trustee of a 401(k) plan sued the insurer providing investment and recordkeeping services to the plan through a group variable annuity contract. Suit was brought on behalf of the plan and a purported class of all other plans that purchased the insurer’s variable group annuity product. The trustee claimed that the insurer breached its alleged ERISA fiduciary duty and committed a prohibited transaction by establishing and operating the platform and receiving revenue sharing payments from mutual funds (or affiliates of the funds) held in separate accounts and made available to the insurer’s customers through its group variable annuity contracts under the platform.

District Court Decision in Leimkuehler

The U.S. District Court for the District of Indiana granted the insurer summary judgment on the claims, holding that the insurer was not acting as a fiduciary under ERISA in establishing and operating the platform through which it received revenue sharing. The Seventh Circuit affirmed the judgment of the district court and held that an insurer was not acting as an ERISA fiduciary in structuring the platform and could therefore not be liable for breach of ERISA fiduciary duty or prohibited transactions in receiving the revenue sharing payments.

ERISA Fiduciary Status

The Seventh Circuit confirmed that the creation of a menu of funds as part of a product offering to retirement plan trustees does not give rise to ERISA fiduciary status. It also expressly held that ERISA’s fiduciary status analysis is not altered merely because the insurer established and maintained separate accounts to hold specified mutual funds.

While an insurer may be an ERISA fiduciary as to the actual operation of such separate accounts, the court held that it can only be liable if it "mismanaged the separate account—say, by losing track of participants’ contributions or withdrawing funds in the separate account to pay for a company-wide vacation to Las Vegas."

The court also expressly rejected arguments made in an amicus curiae brief submitted by the Department of Labor, and held that an insurer's contractual ability to substitute funds did not give rise to fiduciary status with respect to all of the investments that the insurer includes on its product platform.

In PBGC, Second Circuit Affirms Dismissal of Prudence Claims Despite Allegations of Investment Losses

Summary

In a ruling affirming the dismissal of prudence claims under ERISA, the Second Circuit emphasized that the test for prudence focuses on process rather than simply investment results. The court noted that prudence claims regarding investments in securities must demonstrate the fiduciary used an imprudent process to buy and hold the securities, and that a security’s drop in market price does not, by itself, mean the holding of the securities was or is imprudent.

In PBGC. v. Morgan Stanley Investment Management, Inc., No. 10-4497-cv (April 2, 2013), the Second Circuit held that a complaint’s allegations of "a decline in a security’s market price does not, by itself, give rise to a reasonable inference that the holding of the security was or is imprudent." The court concluded that an ERISA complaint asserting imprudence regarding plan investments in securities must plausibly allege that the process utilized by the relevant fiduciary in deciding to acquire and hold the securities was imprudent.

District Court Decision in PBGC

As described in our analysis of the district court opinion, in PBGC a plan sponsor claimed that the manager of the plan’s fixed-income portfolio had imprudently caused the plan to invest excessively in securities backed by subprime mortgages. When the value of those securities dropped following the subprime real estate crash in 2007 and 2008, the portfolio allegedly lost $25 million. (The Pension Benefit Guaranty Corporation ("PBGC") was substituted as appellant after the plan was terminated and assumed by the PBGC.) The district court dismissed the plan sponsor’s complaint, reasoning that under ERISA a fiduciary’s "actions are not to be judged from the vantage point of hindsight."

The Test for Prudence

In affirming that dismissal, the Second Circuit emphasized that the test for prudence focuses on process rather than simply investment results. The court of appeals noted that, because the complaint contained no allegations directly relating to the manager’s "knowledge, methods, or investigations" regarding the challenged investments, it could survive a motion to dismiss under FRCP 12(b)(6) only if it alleged facts and circumstances that gave rise to a reasonable inference that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.

According to the court, this standard could be satisfied by allegations showing that the relevant investments were "so plainly risky" that appropriate investigation would have revealed their imprudence, or that an adequate review would have uncovered a "readily apparent" superior alternative investment.

The Second Circuit ruled that the complaint in PBGC failed to meet this standard. The court noted that PBGC pointed to certain "warning signs" regarding the relevant securities alleged in the complaint – e.g., that some issuers of the securities disclosed large losses in 2007 and 2008. The complaint, however, "fail[ed] to connect the alleged ‘warning signs’ to any specific characteristics of the securities in the [plan’s fixed-income] portfolio."

Upcoming Conferences

Goodwin Procter partner Jamie Fleckner will present at the following upcoming conferences.

DOL Disclosure Rules and Fee Litigation
ERISA Litigation Congress
September 9, 2013
New York, NY

ERISA Litigation Update
PlanAdviser National Conference
September 11, 2013
Orlando, FL

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

Thomson Reuters 26th Annual ERISA Litigation Conference
November 7, 2013
New York, NY