The ERISA Report Volume 16 Issue 2 | Recent Cases of Interest

Second Circuit

California Anti-Discretion Law Applies Only to California Residents, and Pre-2018 Claim Regulations Do Not Require Disclosure of Information Developed on Administrative Appeal

In Mayer v. Ringler Associates Inc., 9 F.4th 78 (2d Cir. 2021), the Second Circuit addressed two issues of first impression: it is the first circuit court to hold clearly that California’s anti-discretion clause does not benefit non-residents of California; and it aligned the Second Circuit with other circuits in holding that ERISA claim regulations applicable to claims filed prior to April 2018 do not require a claim fiduciary to give the claimant an opportunity to review and comment on information developed on administrative appeal before the appeal decision is issued.

Mayer involved a dispute over calculation of benefits payable to a disabled claimant. The facts pertaining to the benefit calculation issue are unique and rather complex, and ultimately turned on whether Mayer’s “employer” was a single member LLC he had formed, or an umbrella company that acquired the disability policy and administered the benefit plan. More significant were the disputes over the proper standard of review.

Mayer, a New York resident, argued that, although the plan granted discretion to the claim fiduciary, de novo review was required because: the policy was issued in California, and California law barred certain grants of discretion; and the fiduciary allegedly violated 29 C.F.R. § 2560.503-1 by declining his request to review and respond to material developed on administrative appeal before it made its final determination. The court accepted the positions advanced by the fiduciary on both issues, and also confirmed the benefit calculation.

California Insurance Code § 10110.6(a) voids grants of discretion in any policy “offered, issued, delivered, or renewed, whether or not in California, that provides or funds ... disability insurance coverage for any California resident[.]” The court noted that “[w]hile § 10110.6(a) seems focused on ‘California resident[s],’ it is possible to read the provision to void all grants of discretion in any group policy, such as the one at issue here, that provides benefits to even one California resident, even if the claimant himself is not a California resident and not otherwise connected to California.” The court identified several problems with that more-expansive interpretation.

First, it “would raise concerns under the Commerce Clause of the U.S. Constitution because it would allow for ‘the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State.’”

Next, the court stated: “To the best of our knowledge, no court has interpreted that statutory language to extend to claimants who are not California residents. Our sister circuits have not addressed this issue, but district courts that have considered it, including those in the Ninth Circuit, have concluded that § 10110.6 applies when the claimant is a resident of California, not when the policy potentially insures some other beneficiary who resides in California.”

Finally, the court explained: “In addition to the constitutional concerns it would raise and the tension it would create with prior case law, we note that Mayer's expansive interpretation of § 10110.6 would also ‘undermine the significant ERISA policy interests of minimizing costs of claim disputes and ensuring prompt claims-resolution procedures’ because the standard of review applicable to a given claimant would depend on the residence of any other person insured under the policy, assuming one might be from California.”

As a result, the court concluded: “Because Mayer is not a California resident, we conclude that the Plan's grant of discretionary authority … is not void under California Insurance Code § 10110.6.”

Next, the court turned to Mayer’s argument that the fiduciary violated the pre-April 2018 version of Section 503-1 by not turning over documents considered on administrative appeal, before deciding the administrative appeal. Here, the court explained: “We have not addressed whether providing a ‘full and fair review’ pursuant to the version of § 2560.503-1(h)(4) applicable to Mayer's claim requires the claims administrator to provide the claimant with documents developed or considered during the administrative appeal in advance of the final determination. However, those circuits that have considered this question have uniformly concluded that it does not.”

The court held: “We join these circuits and hold that the version of § 2560.503-1(h)(4) in effect at the time of Mayer's claim does not require the claims administrator to produce documents developed or considered during the administrative appeal before rendering its final determination. Therefore, providing Mayer's claim a ‘full and fair review’ did not require Hartford Life to produce documents developed or considered while Mayer's claim was under review prior to a final determination.”

Patrick Begos
Robinson & Cole
Stamford, CT

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Fourth Circuit

Court Revives ERISA Litigation Accusing Aetna and OptumHealth of Tricking Patients into Paying Unbillable Administrative Fees

In Peters v. Aetna, Inc., 2 F.4th199 (4th Cir. 2021), the Fourth Circuit, in a lengthy opinion, reversed a ruling for Aetna, Inc. (“Aetna”) and OptumHealth Care Solutions, Inc. (“Optum”) (collectively “appellees”), reviving a potential class action alleging that they agreed to use a “dummy code” to disguise unbillable administrative fees as billable medical treatment and permitting Appellant, Sandra Peters (“Peters” or “Appellant”), to proceed with ERISA claims for disgorgement of profits, surcharge, and declaratory and injunctive relief, on her own behalf and on behalf of Mars, Inc.’s (“Mars”) self-funded health plan.

In June 2015, Peters filed a class action against Appellees, alleging violations of §§ 404 and 502(a)(1)–(3) of ERISA. Specifically, she alleged Appellees breached their fiduciary duties to her and the Plan based on Aetna’s arrangement to have the Plan and its participants pay Optum’s administrative fee via a bundled rate. Peters also alleged that Appellees engaged in comparable violations in their dealings with similarly situated plans and their participants, so she requested to represent two classes of such similarly situated plans and their participants. Peters sought equitable relief on behalf of herself, the Plan, and the class members in the form of restitution, surcharge, disgorgement, and declaratory and injunctive relief.

The United States District Court for the Western District of North Carolina denied class certification because it determined the ascertainability and commonality requirements of Fed. R. Civ. P. 23(a) were not satisfied and concluded that neither Aetna nor Optum could be held liable under ERISA, as they were not operating as fiduciaries and granted summary judgment in their favor. Peters appealed to the Fourth Circuit.

The Fourth Circuit, in finding the financial loss analysis is to be conducted at the individual claims level rather than at the aggregate level, held that Appellant suffered a financial injury sufficient to establish an injury-in-fact for the purposes of Article III standing. As Appellant adequately demonstrated that she and the Plan suffered a financial injury, she satisfied the injury-in-fact requirement for Article III standing and was permitted to proceed with her claim for restitution on the merits. The court further found, even if Appellant failed to demonstrate a financial injury for standing purposes as to the restitution claim, her allegations revolving around breach of fiduciary duty would separately provide her standing to pursue claims for surcharge, disgorgement, and declaratory and injunctive relief. The court noted that Appellant need not demonstrate a personal financial loss to establish standing to request disgorgement of improper gains, surcharge, or for declaratory and injunctive relief.

With regard to the restitution claim, the court held Appellant was required to show personal financial harm to establish compensable injury on the merits. It further held that Appellant failed to show such an injury; therefore, her individual claim under § 502(a)(1) and (3) also failed, and the district court’s grant of summary judgment on those claims was affirmed. However, the court was unable to conduct the necessary appellate review as to whether her claims for restitution on behalf of the Plan would succeed or fail or survive the motions for summary judgment. Therefore, it vacated and remanded that issue to the district court.

The court next concluded that Appellant produced sufficient evidence to create genuine disputes of material fact with regard to the claims for surcharge, disgorgement, and declaratory and injunctive relief under § 502(a)(1) and (3) so as to survive summary judgment. It found the record contained sufficient evidence to permit a reasonable factfinder to determine that Aetna, based on its course of conduct, was a functional fiduciary. Specifically, Appellant’s evidence was sufficient to show that Aetna’s intentional implementation of the dummy CPT code/bundled rate scheme was a discretionary act that a reasonable factfinder could find gave rise to functional fiduciary status. Therefore, the district court erred in granting summary judgment in favor of Aetna on that issue. The court further concluded the district court’s grant of summary judgment in favor of Aetna on the breach of fiduciary claim was also improper because a reasonable factfinder could conclude that Aetna breached its duties through misrepresentations in EOBs and Appellant was not required to demonstrate detrimental reliance. Accordingly, the Fourth Circuit held that Appellant withstood summary judgment on her claims for surcharge, disgorgement, and declaratory and injunctive relief under § 502(a)(1) and (3), and for those claims on behalf of the Plan, as well as possibly restitution, under § 502(a)(2).

The court found Appellant failed to show Optum was operating as a functional fiduciary; however, it held the district court improperly concluded at the summary judgment stage that Optum could not be held liable under the related theory that it was a party in interest engaged in prohibited transactions. Therefore, the district court erred in granting summary judgment to Optum insofar as it could not be held liable as a party in interest under ERISA.

Lastly, the court considered the district court’s denial of Appellant’s motion for class certification and held the district court analyzed ascertainability and commonality too rigidly. The district court hinged its lack of ascertainability determination on its perception of Appellant’s theory of financial injury. However, since Appellant could withstand summary judgment as to surcharge, disgorgement, and declaratory and injunctive remedies without regard to financial injury, the district court’s basis for denying class certification on those claims was erroneous. The district court also abused its discretion when assessing commonality as Appellant’s proposed classes could potentially meet the commonality requirement when it is reexamined based on the claims surviving summary judgment. Although the court did not express an opinion on Appellant’s ability to satisfy the full criteria of Rule 23 on remand, it vacated and remanded the district court’s order denying class certification so that it may consider anew its analysis of all the Rule 23 requirements in conformity with the court’s opinion.

Scott M. Trager
Funk & Bolton, P.A.
Baltimore, MD

Mandatory Victims Restitution Act Authorizes Government Seizure of ERISA-Governed Retirement Benefits

In United States v. Frank, 8 F.4th 320 (4th Cir. 2021), the Fourth Circuit considered whether the government has authority to garnish an ERISA-governed 401(k) retirement account under the Mandatory Victims Restitution Act of 1996 (“MVRA”) (mandating that courts shall order defendants to make restitution to victims for specific offenses) to satisfy a criminal restitution order. The Fourth Circuit agreed with the main holding of the United States District Court for the Eastern District of Virginia that the MVRA authorizes garnishment of ERISA-protected retirement funds pursuant to criminal restitution orders as the MVRA expressly provides that restitution orders may be enforced against all property or rights to property notwithstanding any other federal law. In so holding, the Fourth Circuit joined the Second, Fifth, Seventh, and Ninth Circuits in finding that retirement funds may be used to satisfy criminal restitution orders.

In this case, Jon Lawrence Frank (“Appellant”) embezzled over $19 million from his former employer, NCI Information Systems, Inc., by making unauthorized payments of company funds to his personal bank accounts. After his scheme was uncovered, he pled guilty to one count of wire fraud. The court ordered Frank to pay restitution of $19,440,331. The government recovered over $7 million and attempted to garnish Appellant’s 401(k) retirement account under the MVRA, naming Schwab as the garnishee since it held approximately $479,504 in the account, which is covered by ERISA. Appellant argued that the government could not garnish his retirement account because it was governed by ERISA’s anti-alienation provision (which protects covered retirement benefits from dissipation through payment to third parties) and that, even if the government could access the account, it would be subject to the same withdrawal limits as Appellant himself, precluding a lump-sum withdrawal of the full amount. Appellant further claimed that the wage garnishment restriction of the Consumer Credit Protection Act of 1968 (“CCPA”) limited the government’s recovery to 25% of the funds in the account.

A magistrate judge rejected Appellant’s core contention that ERISA bars the government’s seizure of his 401(k) account and concluded that the MVRA overrode ERISA’s anti-alienation provision, which was consistent with the view of other courts that have considered the issue. The magistrate judge further ruled that the government could access as much of the account as Appellant could, but no more. The magistrate judge also stated that access to the account would be subject to any tax withholdings by Schwab under the terms of the plan.

The district court accepted nearly all of the magistrate judge’s findings, with the exception of the withholding limitation. Instead, the district court held that the government has the right to force the immediate liquidation of the entire 401(k) account and that, as a matter of equity, the government should remit 10% of the account to Appellant to offset any additional tax penalty incurred.

The Fourth Circuit, addressing the interplay between the MVRA and ERISA’s anti-alienation provision, agreed with the district court that the MVRA permits garnishment of ERISA-protected retirement funds pursuant to criminal restitution orders. Specifically, Congress’s mandate that the MVRA allows for seizure of all property or rights to property notwithstanding any other federal law makes clear that ERISA’s anti-alienation provision cannot impede enforcement of criminal restitution orders against 401(k) accounts. Further, the MVRA makes clear that restitution orders operate in the same manner as tax levies, and it is well established that ERISA-protected accounts are not exempt from levies to satisfy outstanding tax obligations. The Court further agreed with the district court that the government is entitled to the same lump sum distribution from Appellant’s 401(k) account as Appellant himself, and that the CCPA’s garnishment cap did not apply.

The Fourth Circuit did part ways with the district court in one respect – the government is entitled to seize no more than the funds to which Appellant had a present property right, and the district court did not consider whether there were conditions limiting Appellant’s current property right in his 401(k) account. The Court explained that the government stands in the shoes of the Appellant and has the same rights to the 401(k) account as Appellant. That meant the government’s access to the funds would be subject to the terms of the governing plan document, including any early withdrawal penalties to which Appellant would be subject. It therefore vacated the judgment of the district court and remanded for a determination of what present right Appellant had and, by extension, the government had, in the account’s funds.

Scott M. Trager
Funk & Bolton, P.A.
Baltimore, MD

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Fifth Circuit

Estoppel Claim Under ERISA Not Established

In Talasek v. National Oilwell Varco, L.P., 2021 WL 4860133 (5th Cir. 2021), an employee of National Oilwell Varco had attempted to enroll in a $300,000 supplemental group life insurance plan but was rejected for lack of proof of the required evidence of insurability by the employee welfare benefit plan’s insurer. Nonetheless, and unfortunately, for the next four years the employer made payroll deductions for premium payments, and the employee regularly received statements from his employer’s benefits service center reflecting the elections and that funds were being deducted for the coverage.

When the supplemental life insurance plan was established, Talasek attempted to enroll. He received a statement that indicated that several of his elections were suspended because the coverage that was listed required approval. Indeed, the group life insurance policy and the Summary of Benefits clearly required Talasek to complete an “Evidence of Insurability” form before coverage could begin. The Summary of Benefits further provided that coverage began after the insurer, Unum Life Insurance Company of America, approved the Evidence of Insurability. Talasek submitted the form on January 2, 2014, and was subsequently diagnosed with pancreatic cancer. Unum sent Talasek a letter stating that it had identified an error in his application with respect to the Evidence of Insurability form, and that more information was needed. He was required to provide blood and urine samples. Given his condition, the lab results were abnormal. Unum sent him a letter in March 2014, explaining that it was unable to approve the coverage.

Nonetheless, for the next four years, Talasek received statements from his employer’s benefits service center that reflected the elections and the deduction of funds from his paycheck for coverage. After his death due to the cancer, his beneficiary submitted a claim for the $300,000 in benefits. After the claim and his appeal were denied, the beneficiary brought suit against Unum and National Oilwell Varco alleging estoppel, negligence, and violation of ERISA. After summary judgment was granted for the defendants on all claims, the plaintiff appealed only the summary judgment in favor of National Oilwell Varco on her estoppel claim.

The Fifth Circuit is one of the circuits that recognizes estoppel theories under ERISA. E.g., Mello v. Sara Lee Corp., 431 F.3d 440, 445–46 (5th Cir. 2005). The court identified the three requirements of estoppel: a misrepresentation; a reasonable reliance on the misrepresentation; and a reliance on the misrepresentation to one’s detriment. The court stated it was difficult to imagine a misrepresentation that was more likely to mislead a recipient than the one in this case, where every year for four years, Talasek received statements from National Oilwell Varco, purporting to identify the benefits elected and indicating the amount of the deduction for each element of coverage, including the supplemental life insurance coverage. But the court went on to find that the reliance was not reasonable. Citing Fifth Circuit precedent that an employee cannot reasonably rely on informal documents in the face of unambiguous terms in insurance plans, the court noted the unambiguous requirement in the group policy and in the Summary of Benefits that Talasek complete an Evidence of Insurability form before coverage could begin. The court noted the plaintiff was not arguing that she and her husband had relied on the employer’s representations to help them interpret an ambiguous or unclear term in the Summary of Benefits. Instead, she contended that it was reasonable to rely on the employer’s representations rather than the unambiguous group policy language. The court stated, “Against this backdrop, we cannot say that Talasek’s reliance on [the employer’s] statements and deductions was reasonable—no matter how frustrating those misrepresentations were in reality.” Thus, the court held that given the plaintiff could not establish the reliance on the misrepresentations was reasonable, her estoppel claim failed, and the grant of summary judgment was affirmed.

Cove Geary
Jones Walker LLP
New Orleans, LA

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Ninth Circuit

Insurer Did Not Abuse Discretion by Applying Preexisting Condition Clause

In Sorger v. Novartis Corp., 2021 WL 3758280 (9th Cir. 2021), Neil Sorger appealed the district court’s decision that the Novartis Corporation Death Benefit and Disability Plan (“Plan”) and Metropolitan Life Insurance Company (“MetLife”) had not abused their discretion by terminating his supplemental LTD benefits pursuant to the Plan’s preexisting condition clause. The self-funded Plan entitled participants to basic LTD benefits with the option to purchase supplemental coverage. The funds for these supplemental benefits were held in a Voluntary Employee Benefit Association Trust (“Trust”). The employer was reimbursed by the Trust for supplemental benefits paid out under the Plan. MetLife served as the claims and plan administrator.

First, the Ninth Circuit confirmed there was no evidence that the Trust was anything other than a funding mechanism, let alone its own separate ERISA plan. Second, the Ninth Circuit affirmed there was no structural conflict of interest, and that the Plan unambiguously gave MetLife discretion. The proper standard of review was therefore abuse of discretion. Third, the district court did not abuse its discretion in concluding that the preexisting clause was valid. Sorger argued the clause was invalid because it stated MetLife would establish the preexisting condition limitations when MetLife had failed to set the relevant limitation. But the Ninth Circuit found that the “plain language of the Plan and Task Orders” expressly incorporated the entire Plan description prepared by Novartis, giving MetLife express discretionary authority to construe and enforce the Plan description. Sorger’s argument that the Plan impermissibly delegated authority to MetLife also failed because Novartis set the terms of the Plan description, which MetLife accepted.

Fourth, the Ninth Circuit confirmed the district court’s finding that MetLife did not abuse its discretion by “(1) interpreting part of the pre-existing condition clause as requiring twelve consecutive months as an active employee; (2) applying the pre-existing condition clause even though Sorger assertedly was not diagnosed with or specifically treated for his pre-existing condition during the look-back period; and (3) determining that the pre-existing condition clause did not expire on January 1, 2014.” The Plan stated that supplemental LTD coverage for a preexisting condition would not take effect until 12 months after the effective date of the coverage, which the district court properly interpreted to mean Sorger would be able to seek supplemental LTD benefits coverage for his pre-existing condition beginning January 1, 2014. This did not negate the preexisting condition clause however, nor negate other Plan terms that could prevent Sorger from obtaining supplemental coverage for a preexisting condition.

Finally, the Ninth Circuit confirmed MetLife had not abused its discretion in denying coverage for the preexisting condition based on the evidence in the record that Sorger had received medical treatment for his condition during the look-back period.

Karen Tsui
Burke Williams and Sorensen, LLP
Los Angeles, CA

On Remand, Plan Failed to Engage in Meaningful Dialogue with Claimant

In Dimry v. Bert Bell/Pete Rozelle NFL Player Ret. Plan, 855 F. App'x 332 (9th Cir. 2021), the Ninth Circuit reviewed cross-appeals from an action to recover LTD benefits from the Bert Bell/Pete Rozelle NFL Player Retirement Plan, the NFL Player Supplemental Disability Plan, and the plan administrator, the Retirement Board (collectively, the “Plan”), and affirmed that the Plan had committed procedural error in evaluating Charles Dimry’s claim.

ERISA requires plan administrators to afford a “full and fair review,” which cannot be achieved without “meaningful dialogue between ERISA plan administrators and their beneficiaries,” including requesting more information when needed. Plan administrators fail to meet this duty when communications are “opaque or nonexistent.”

The Ninth Circuit agreed with the district court that the Plan’s actions on remand violated the “meaningful dialogue” requirement by keeping Dimry “in the dark during the entirety of the remand process.” The Plan did not provide notice that the remand process had begun; indicate how the process would take place; inform Dimry that it intended to reopen the record for additional reports from the Plan’s medical director; or allow Dimry the opportunity to respond to those reports. The matter was remanded to the district court to determine if Dimry was entitled to benefits, which included the presentation of additional evidence.

Karen Tsui
Burke Williams and Sorensen, LLP
Los Angeles, CA

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