ERISA Deference: No Exceptions

More recently, with its 2010 decision of Conkright v. Frommert, 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), the Supreme Court has once again opted to resist a proposed carve-out to the general rule of deference to ERISA plan administrators ' this time in situations where an administrator's first attempt to construe an ERISA plan has been held by the reviewing court to be unreasonable.

Firestone and Glenn

In the Glenn decision, the Supreme Court held that where an ERISA plan administrator is also the payer of plan benefits, a systemic conflict of interest exists. In explaining how a court reviewing the decision of a plan administrator must treat such a conflict, the Supreme Court resisted arguments that anything more heightened than a deferential standard of review should be applied. The Supreme Court thereby effectively overturned the approaches of a number of circuit courts which had been reviewing decisions of conflicted plan administrators under a heightened standard.

The Glenn decision involved a dispute between Metropolitan Life Insurance Company (“MetLife”), as administrator and insurer of the ERISA-governed long-term disability plan of Sears Roebuck & Company, and a Sears employee who was a beneficiary of that plan. According to the Supreme Court, after the employee was diagnosed with a heart disorder, MetLife determined in June 2000 that the employee was unable to perform her job duties, which entitled her to an initial 24 months of plan benefits. MetLife also encouraged the employee to apply for Social Security disability benefits, and directed her to a law firm that would assist her with her application. After an Administrative Law Judge determined that the employee's illness prevented her from performing not only her own job but any jobs for which she qualified existing in significant numbers in the national economy, the Social Security Administration granted permanent disability benefits to the employee, retroactive to April 2000.

Three-quarters of the backdated benefits went to MetLife and the remainder went to the law firm. After the initial 24-month period of the MetLife plan benefits expired, the employee had to meet a stricter, Social Security-type standard to continue to qualify for benefits under the plan. Specifically, she had to show that she was incapable of performing the material duties of not only her own job, but any other gainful occupation for which she was reasonably qualified. MetLife denied the extended benefits to the employee because it found that she was capable of performing sedentary work. The employee disputed the finding, and after exhausting her administrative remedies, she filed suit in federal court, seeking judicial review of the administrator's decision.

The District Court declined to set aside the administrator's decision. 2005 WL 1364625, No. 2:2003CV0572 (S.D.Ohio, June 8, 2005). However, on appeal, the Sixth Circuit set aside the denial of benefits in light of a number of cited factors, one of which was the conflict of interest that exists where an ERISA plan administrator is also the plan payer. 461 F.3d at 660 (6th Cir. 2006). MetLife sought certiorari, asking the Supreme Court to determine whether the systemic conflict of interest recognized by the Sixth Circuit exists, and to consider how such a conflict should be taken into account on judicial review of a discretionary benefit determination.

In answer to the first question, the Supreme Court held that there is an inherent conflict of interest where a plan administrator both evaluates and pays claims for benefits. In its discussion, the Court examined its earlier decision of Firestone, in which it addressed the appropriate standard of review courts should apply to benefits determinations by plan administrators under ' 1132(a)(1)(B). “A civil action may be brought ' by a participant or beneficiary ' to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. ' 1132(a)(1)(B).

In reviewing this key statutory provision in Firestone, the Supreme Court held that courts reviewing ERISA plan determinations should be guided by principles of trust law. Pursuant to such principles, a court will review a denial of plan benefits de novo unless the plan provides to the contrary. If the plan grants the administrator discretionary authority to determine eligibility for benefits, then a deferential standard of review is appropriate. Finally, if the administrator is operating under a conflict of interest, that conflict must be weighed as a factor in determining whether there has been an abuse of discretion in the benefits determination. The Court decided that an administrator's dual role as both evaluator and payer of benefits creates the kind of conflict of interest referred to in Firestone.

The Supreme Court then turned its attention to the second question: how a reviewing court should account for this systemic conflict of interest. The Court decided that despite the conflict of interest, the standard of review would remain deferential; in other words, the decision of a conflicted administrator will still be reviewed for an abuse of discretion, irrespective of the degree of seriousness of the conflict. This approach, explained the Court, is in line with the principles of trust law, which “continues to apply a deferential standard of review to the discretionary decision making of a conflicted trustee, while at the same time requiring the reviewing judge to take account of the conflict when determining whether the trustee, substantively or procedurally, has abused his discretion.” Glenn, 554 U.S. 105, 128 S.Ct. 2343.

In maintaining a deferential standard of review in the face of a conflict of interest, the Court explained that it is not “necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payer conflict.” Id. at 2351. Rather, the conflict is merely one factor that a reviewing judge will take into account in determining whether the administrator's benefits decision constitutes an abuse of discretion.

Effect of Glenn on the Circuit Courts

By declining to carve out an exception to the rule of deferential review of ERISA plan benefits decisions, the Supreme Court in its Glenn decision effectively overturned a number of circuit courts which had been applying a heightened standard of review when faced with conflicted administrators.

Several of these circuit courts referred to this approach as the “sliding scale” approach: The reviewing judge would give the administrator's decision less deference, on a sliding scale, in accordance with the level and seriousness of the conflict that the judge perceived. See, e.g., Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377 (3d Cir. 2000); Vega v. Nat'l Life Ins. Servs., Inc., 188 F.3d 287 (5th Cir. 1999); Mers v. Marriott Int'l Group Accidental Death & Dismemberment Plan, 144 F.3d 1014 (7th Cir. 1998); Clapp v. Citibank, 262 F.2d 820 (8th Cir. 2001); Jones v. Kodak Medical Assistance Plan, 169 F.3d 1287 (10th Cir. 1999). In employing the sliding scale approach, these courts could even heighten the level of review to de novo. See, e.g., Woo v. Deluxe Corp., 144 F.3d 1157 (8th Cir. 1990).

Following the Glenn decision, circuit courts that had applied the sliding scale approach were compelled to abandon it in favor of deferential review. For example, in Hackett v. Standard Ins. Co., 559 F.3d 825 (8th Cir. 2009), which was decided after Glenn, the Eighth Circuit explained that prior to Glenn, a reviewing court faced with a conflicted administrator “would review the administrator's decision using a sliding-scale approach, decreasing the deference given to the administrator in proportion to the seriousness of the conflict of interest.” Hackett, 559 F.3d at 830. However, the Appellate Court then acknowledged that Glenn “made clear the conflict does not change the standard of review applied by the district court.” Id. The Third Circuit, which also applied the sliding scale approach prior to Glenn, has recently referred to the old method as “the now-discredited sliding scale approach.” Goletz v. Prudential Ins. Co. of America, 2010 WL 2254972 at *2, No. 08-4740 (3rd Cir. June 7, 2010).

The approaches of other circuit courts that did not expressly adopt the “sliding scale” approach, but which applied other forms of heightened scrutiny to conflicted administrators, have also been effectively overturned by the Glenn decision. For example, prior to Glenn, the Second Circuit reviewed decisions of administrators de novo if it found that a conflict of interest actually influenced the administrator's decision. In the wake of Glenn, the Second Circuit has acknowledged that its prior approach is “inconsistent” with Glenn, and a deferential standard of review is required “even where the plaintiff shows that the conflict of interest affected the choice of a reasonable interpretation.” McCauley v. First Unum Life Ins. Co., 551 F.3d 126, 133 (2d Cir. 2008).

Conkright

The Supreme Court recently handed down its decision in Conkright v. Frommert, 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), making it clear that it would continue to resist efforts to carve out exceptions to the deferential standard of review established by Firestone and maintained in Glenn.

The dispute underlying the Conkright case involved employees who left Xerox Corporation, received lump-sum distributions of the retirement benefits that they had earned up to that point, and were later rehired. Xerox's ERISA plan (the “Plan”) did not clearly define how to account for the past distributions in calculating the rehired employees' current benefits. In Xerox's first attempt at accounting for the past distributions, the Plan administrator employed a so-called “phantom account” method, pursuant to which the administrator calculated the growth that the employees' lump-sum distributions would have experienced had the money remained in the Plan, and reduced the current benefits accordingly. The rehired employees filed suit in federal court, challenging the administrator's decision under ERISA. The District Court, applying a deferential standard of review to the administrator's interpretation of the Plan pursuant to Firestone and Glenn, granted summary judgment in favor of the Plan and the administrator. 328 F.Supp.2d 420 (W.D.N.Y. 2004). On appeal, the Second Circuit vacated and remanded, holding that application of the phantom account method constituted a prohibited reduction of justified expectations of the rehired employees' accrued benefits pursuant to ERISA ' 204(g), 29 U.S.C. ' 1054. 433 F.3d 254 (2d Cir. 2006).

On remand, the District Court considered alternative approaches to the phantom account method. The Plan administrator proposed an approach that accounted for the time value of money by using an interest rate that was fixed at the time of the lump sum distributions (and therefore arguably would not violate the rehired employees' justified expectations), and requested that the District Court apply a deferential standard of review to the administrator's proposed approach. However, the District Court declined to do so, reasoning instead that the court (rather than the administrator) “must interpret the Plan as written and consider what a reasonable employee would have understood to be the case concerning the effect of prior distributions.” 472 F.Supp.2d 452 (W.D.N.Y. 2007).

Finding the Plan to be ambiguous, the District Court decided to reduce the current value of the rehired employees' benefits by the amount of the lump-sum distributions, on a dollar-for-dollar basis, without accounting for the time value of money. On appeal by the administrator, the Second Circuit affirmed that the District Court was correct not to apply a deferential standard on remand. 535 F.3d 111 (2d Cir. 2008).

The Supreme Court reversed the decision of the Second Circuit, holding that the District Court had owed deference to the Plan administrator's interpretation of the Plan when the case had been remanded by the Second Circuit, even though the administrator's first attempt to construe the Plan had been found by the Second Circuit to violate ERISA.

The Court began its analysis by explaining that the standard for reviewing decisions of plan administrators had been established by its decision in Firestone, where it looked to trust law and determined that when a benefit plan gives the administrator authority to construe the terms of the plan, that interpretation will not be disturbed if reasonable ' a deferential standard of review. The Court then explained that its decision in Glenn expanded the Firestone approach by holding that under principles of trust law and the legislative purposes of ERISA, a deferential standard of review (which the Court refers to as “Firestone deference”), Conkright, 130 S.Ct. at 1642, remains appropriate even where the plan administrator is operating under a conflict of interest.

The Second Circuit, explained that the District Court, had decided to craft an exception to Firestone deference by holding that a court need not apply a deferential standard of review where the plan administrator has previously construed the plan terms and the court finds that the first interpretation violates ERISA. Under the Second Circuit's approach, a reviewing court would be entitled to reject a plan administrator's interpretation of the plan, even if reasonable, if that administrator's previous interpretation has been overturned.

The Supreme Court rejected what it characterized as the Second Circuit's “one-strike-and-you're-out” approach. Id. at 1643. First, the Court noted that the Circuit Court decision was inconsistent with the broad standard of deference established in Firestone, which was not susceptible to “ad hoc exceptions.” Id. As the Court pointed out, it had declined to create an exception to Firestone deference in Glenn, where it opted to maintain a deferential standard of review even in the face of a systemic conflict of interest.

Second, the Court found the Second Circuit's approach to be inconsistent with the principles that underlay its holdings in Firestone and Glenn: the terms of the plan under review, the principles of trust law, and the purposes of ERISA.

Terms of the Plan

Concerning the terms of the Plan, the Supreme Court noted that the Plan grants the Plan administrator the power to “[c]onstrue the Plan” and does not expressly limit that power to the first efforts to construe the plan. Id. at 1647.

Principles of Trust Law

The Supreme Court next examined the application of principles of trust law to the issue of a single honest mistake by a Plan administrator, and found trust law to be unclear. The Supreme Court cited treatises and cases maintaining that a court could control a trustee in his or her exercise of power if he or she acted beyond the bounds of reasonable judgment, but also cited sources maintaining that in the event a trustee makes a mistake but there is no basis to believe that the trustee will not fairly exercise his or her power, the court will not control the trustee; rather, the court will order that the trustee make a reasonable determination. The Supreme Court identified yet a third approach, pursuant to which a court faced with a trustee who committed an error would establish a range of maximum and minimum limits within which the trustee could render a decision.

Purposes of ERISA

The Supreme Court then instructed that while the principles of trust law did not supply an answer to the issue before the Court, the guiding purposes of ERISA did supply an answer. The Supreme Court noted that ERISA represents a “careful balancing” between “ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans. Id. at 1649. It was also noted that Congress sought to create a system that is not so complex that litigation and administrative costs would “unduly discourage employers from offering [ERISA] plans in the first place.” Id., citing, Varity Corp v. Howe, 516 U.S. 489, 497 (1996). The Court distilled these guiding purposes of ERISA into three principles: efficiency, predictability, and uniformity. Each of these principles, explained the Court, is served by Firestone deference:

Deference promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation. It also promotes predictability, as an employer can rely on the expertise of the plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review. Moreover, Firestone deference serves the interest of uniformity, helping to avoid a patchwork of different interpretations of a plan, like the one here, that covers employees in different jurisdictions. Id. at 1649.

Holding that the interests of ERISA law in efficiency, predictability and uniformity do not disappear “simply because a plan administrator has made a single honest mistake,” the Court held that the Second Circuit erred in holding that the District Court could refuse to defer to the Plan administrator's subsequent interpretation of the Plan following a single erroneous interpretation. Id.

Conclusion

With its decision in Conkright, the Supreme Court has reaffirmed that it is not open to creating exceptions to Firestone deference. The broad language used by the Court in reaffirming this principle (“Firestone ' set out a broad standard of deference without any suggestion that the standard was susceptible to ad hoc exceptions”) will likely inhibit circuit courts that are tempted to devise a carve-out to Firestone deference in situations not specifically covered by Glenn or Conkright.

Finally, it remains to be seen whether the decisions of Glenn and Conkright will alter the approaches of those circuit courts that apply a heightened standard of review when there is evidence of procedural irregularities in the administration of an ERISA plan. See, e.g., Nichols v. Prudential Ins. Co. of America, 406 F.3d 98 (2d Cir. 2005); Gatti v. Reliance Standard Life Ins. Co., 415 F.3d 978 (9th Cir. 2005). It may be that those courts that apply heightened scrutiny in such circumstances will decide to move to a deferential standard, and approach the procedural irregularities as factors to consider when weighing whether the administrator abused his or her discretion. If those courts decide instead to continue applying heightened scrutiny in such circumstances, the Supreme Court may again find itself taking up the issue of Firestone deference.

Joseph Geoghegan is an associate and Dennis O. Brown is a partner in the Insurance and Reinsurance Department of Edwards Angell Palmer & Dodge LLP. They are based in the firm's Hartford office. Brown is a member of this newsletter's Board of Editors.

Much of the federal litigation brought pursuant to the Employee Retirement and Income Security Act of 1974 (“ERISA”) involves efforts by the beneficiaries of ERISA-regulated employee benefit plans to overturn benefits decisions of the plans' administrators. One recent study found that 65% of ERISA lawsuits in the federal court system involve claims of interference with plan benefits. Pension Governance, Inc. and the Michel-Shaked Group, ERISA Litigation Study (2009), available at www.pensionlitigationdata.com/news.php.

The standard of review that a court applies to such benefit decisions can have a significant impact on the beneficiary's chances of success in the lawsuit. If the court reviews the decision de novo, then it may effectively ignore the interpretation of the ERISA plan performed by the plan administrator and independently review the plan in order to make a benefits determination. See Aetna Health Inc. v. Davila , 542 U.S. 200, 210 (2004). At the other end of the spectrum of review standards, if the reviewing judge is compelled to apply a deferential standard of review to the decision of the plan administrator, then the judge is restricted to reviewing the decision for an abuse of discretion, and must uphold any reasonable interpretation of the ERISA plan offered by the plan administrator. McCauley v. First Unum Life Ins. Co. , 551 F.3d 126, 133 (2d Cir. 2008).

In its 1989 decision of Firestone Tire & Rubber Co. v. Bruch , 489 U.S. 101 (1989), the Supreme Court, applying principles of trust law, decided that where an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits (as many ERISA plans do), then a deferential standard of review is appropriate. In recent years, the Supreme Court has addressed two circumstances in which circuit courts sought to carve out exceptions to the general rule of deferential review. The first of these was the 2008 decision of MetLife v. Glenn , 554 U.S. 105 (2008), in which the Supreme Court decided to maintain the deferential standard of review in situations where a plan administrator operates under a conflict of interest ' effectively overturning the approach of many circuit courts.

More recently, with its 2010 decision of Conkright v. Frommert , 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), the Supreme Court has once again opted to resist a proposed carve-out to the general rule of deference to ERISA plan administrators ' this time in situations where an administrator's first attempt to construe an ERISA plan has been held by the reviewing court to be unreasonable.

Firestone and Glenn

In the Glenn decision, the Supreme Court held that where an ERISA plan administrator is also the payer of plan benefits, a systemic conflict of interest exists. In explaining how a court reviewing the decision of a plan administrator must treat such a conflict, the Supreme Court resisted arguments that anything more heightened than a deferential standard of review should be applied. The Supreme Court thereby effectively overturned the approaches of a number of circuit courts which had been reviewing decisions of conflicted plan administrators under a heightened standard.

The Glenn decision involved a dispute between Metropolitan Life Insurance Company (“MetLife”), as administrator and insurer of the ERISA-governed long-term disability plan of Sears Roebuck & Company, and a Sears employee who was a beneficiary of that plan. According to the Supreme Court, after the employee was diagnosed with a heart disorder, MetLife determined in June 2000 that the employee was unable to perform her job duties, which entitled her to an initial 24 months of plan benefits. MetLife also encouraged the employee to apply for Social Security disability benefits, and directed her to a law firm that would assist her with her application. After an Administrative Law Judge determined that the employee's illness prevented her from performing not only her own job but any jobs for which she qualified existing in significant numbers in the national economy, the Social Security Administration granted permanent disability benefits to the employee, retroactive to April 2000.

Three-quarters of the backdated benefits went to MetLife and the remainder went to the law firm. After the initial 24-month period of the MetLife plan benefits expired, the employee had to meet a stricter, Social Security-type standard to continue to qualify for benefits under the plan. Specifically, she had to show that she was incapable of performing the material duties of not only her own job, but any other gainful occupation for which she was reasonably qualified. MetLife denied the extended benefits to the employee because it found that she was capable of performing sedentary work. The employee disputed the finding, and after exhausting her administrative remedies, she filed suit in federal court, seeking judicial review of the administrator's decision.

The District Court declined to set aside the administrator's decision. 2005 WL 1364625, No. 2:2003CV0572 (S.D.Ohio, June 8, 2005). However, on appeal, the Sixth Circuit set aside the denial of benefits in light of a number of cited factors, one of which was the conflict of interest that exists where an ERISA plan administrator is also the plan payer. 461 F.3d at 660 (6th Cir. 2006). MetLife sought certiorari, asking the Supreme Court to determine whether the systemic conflict of interest recognized by the Sixth Circuit exists, and to consider how such a conflict should be taken into account on judicial review of a discretionary benefit determination.

In answer to the first question, the Supreme Court held that there is an inherent conflict of interest where a plan administrator both evaluates and pays claims for benefits. In its discussion, the Court examined its earlier decision of Firestone, in which it addressed the appropriate standard of review courts should apply to benefits determinations by plan administrators under ' 1132(a)(1)(B). “A civil action may be brought ' by a participant or beneficiary ' to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. ' 1132(a)(1)(B).

In reviewing this key statutory provision in Firestone, the Supreme Court held that courts reviewing ERISA plan determinations should be guided by principles of trust law. Pursuant to such principles, a court will review a denial of plan benefits de novo unless the plan provides to the contrary. If the plan grants the administrator discretionary authority to determine eligibility for benefits, then a deferential standard of review is appropriate. Finally, if the administrator is operating under a conflict of interest, that conflict must be weighed as a factor in determining whether there has been an abuse of discretion in the benefits determination. The Court decided that an administrator's dual role as both evaluator and payer of benefits creates the kind of conflict of interest referred to in Firestone.

The Supreme Court then turned its attention to the second question: how a reviewing court should account for this systemic conflict of interest. The Court decided that despite the conflict of interest, the standard of review would remain deferential; in other words, the decision of a conflicted administrator will still be reviewed for an abuse of discretion, irrespective of the degree of seriousness of the conflict. This approach, explained the Court, is in line with the principles of trust law, which “continues to apply a deferential standard of review to the discretionary decision making of a conflicted trustee, while at the same time requiring the reviewing judge to take account of the conflict when determining whether the trustee, substantively or procedurally, has abused his discretion.” Glenn, 554 U.S. 105, 128 S.Ct. 2343.

In maintaining a deferential standard of review in the face of a conflict of interest, the Court explained that it is not “necessary or desirable for courts to create special burden-of-proof rules, or other special procedural or evidentiary rules, focused narrowly upon the evaluator/payer conflict.” Id. at 2351. Rather, the conflict is merely one factor that a reviewing judge will take into account in determining whether the administrator's benefits decision constitutes an abuse of discretion.

Effect of Glenn on the Circuit Courts

By declining to carve out an exception to the rule of deferential review of ERISA plan benefits decisions, the Supreme Court in its Glenn decision effectively overturned a number of circuit courts which had been applying a heightened standard of review when faced with conflicted administrators.

Several of these circuit courts referred to this approach as the “sliding scale” approach: The reviewing judge would give the administrator's decision less deference, on a sliding scale, in accordance with the level and seriousness of the conflict that the judge perceived. See, e.g., Pinto v. Reliance Standard Life Ins. Co. , 214 F.3d 377 (3d Cir. 2000); Vega v. Nat'l Life Ins. Servs., Inc. , 188 F.3d 287 (5th Cir. 1999); Mers v. Marriott Int'l Group Accidental Death & Dismemberment Plan , 144 F.3d 1014 (7th Cir. 1998); Clapp v. Citibank , 262 F.2d 820 (8th Cir. 2001); Jones v. Kodak Medical Assistance Plan , 169 F.3d 1287 (10th Cir. 1999). In employing the sliding scale approach, these courts could even heighten the level of review to de novo. See, e.g., Woo v. Deluxe Corp. , 144 F.3d 1157 (8th Cir. 1990).

Following the Glenn decision, circuit courts that had applied the sliding scale approach were compelled to abandon it in favor of deferential review. For example, in Hackett v. Standard Ins. Co. , 559 F.3d 825 (8th Cir. 2009), which was decided after Glenn , the Eighth Circuit explained that prior to Glenn , a reviewing court faced with a conflicted administrator “would review the administrator's decision using a sliding-scale approach, decreasing the deference given to the administrator in proportion to the seriousness of the conflict of interest.” Hackett , 559 F.3d at 830. However, the Appellate Court then acknowledged that Glenn “made clear the conflict does not change the standard of review applied by the district court.” Id. The Third Circuit, which also applied the sliding scale approach prior to Glenn, has recently referred to the old method as “the now-discredited sliding scale approach.” Goletz v. Prudential Ins. Co. of America, 2010 WL 2254972 at *2, No. 08-4740 (3rd Cir. June 7, 2010).

The approaches of other circuit courts that did not expressly adopt the “sliding scale” approach, but which applied other forms of heightened scrutiny to conflicted administrators, have also been effectively overturned by the Glenn decision. For example, prior to Glenn, the Second Circuit reviewed decisions of administrators de novo if it found that a conflict of interest actually influenced the administrator's decision. In the wake of Glenn , the Second Circuit has acknowledged that its prior approach is “inconsistent” with Glenn , and a deferential standard of review is required “even where the plaintiff shows that the conflict of interest affected the choice of a reasonable interpretation.” McCauley v. First Unum Life Ins. Co. , 551 F.3d 126, 133 (2d Cir. 2008).

Conkright

The Supreme Court recently handed down its decision in Conkright v. Frommert , 130 S.Ct. 1640, 176 L.Ed.2d 469 (2010), making it clear that it would continue to resist efforts to carve out exceptions to the deferential standard of review established by Firestone and maintained in Glenn .

The dispute underlying the Conkright case involved employees who left Xerox Corporation, received lump-sum distributions of the retirement benefits that they had earned up to that point, and were later rehired. Xerox's ERISA plan (the “Plan”) did not clearly define how to account for the past distributions in calculating the rehired employees' current benefits. In Xerox's first attempt at accounting for the past distributions, the Plan administrator employed a so-called “phantom account” method, pursuant to which the administrator calculated the growth that the employees' lump-sum distributions would have experienced had the money remained in the Plan, and reduced the current benefits accordingly. The rehired employees filed suit in federal court, challenging the administrator's decision under ERISA. The District Court, applying a deferential standard of review to the administrator's interpretation of the Plan pursuant to Firestone and Glenn, granted summary judgment in favor of the Plan and the administrator. 328 F.Supp.2d 420 (W.D.N.Y. 2004). On appeal, the Second Circuit vacated and remanded, holding that application of the phantom account method constituted a prohibited reduction of justified expectations of the rehired employees' accrued benefits pursuant to ERISA ' 204(g), 29 U.S.C. ' 1054. 433 F.3d 254 (2d Cir. 2006).

On remand, the District Court considered alternative approaches to the phantom account method. The Plan administrator proposed an approach that accounted for the time value of money by using an interest rate that was fixed at the time of the lump sum distributions (and therefore arguably would not violate the rehired employees' justified expectations), and requested that the District Court apply a deferential standard of review to the administrator's proposed approach. However, the District Court declined to do so, reasoning instead that the court (rather than the administrator) “must interpret the Plan as written and consider what a reasonable employee would have understood to be the case concerning the effect of prior distributions.” 472 F.Supp.2d 452 (W.D.N.Y. 2007).

Finding the Plan to be ambiguous, the District Court decided to reduce the current value of the rehired employees' benefits by the amount of the lump-sum distributions, on a dollar-for-dollar basis, without accounting for the time value of money. On appeal by the administrator, the Second Circuit affirmed that the District Court was correct not to apply a deferential standard on remand. 535 F.3d 111 (2d Cir. 2008).

The Supreme Court reversed the decision of the Second Circuit, holding that the District Court had owed deference to the Plan administrator's interpretation of the Plan when the case had been remanded by the Second Circuit, even though the administrator's first attempt to construe the Plan had been found by the Second Circuit to violate ERISA.

The Court began its analysis by explaining that the standard for reviewing decisions of plan administrators had been established by its decision in Firestone, where it looked to trust law and determined that when a benefit plan gives the administrator authority to construe the terms of the plan, that interpretation will not be disturbed if reasonable ' a deferential standard of review. The Court then explained that its decision in Glenn expanded the Firestone approach by holding that under principles of trust law and the legislative purposes of ERISA, a deferential standard of review (which the Court refers to as “Firestone deference”), Conkright, 130 S.Ct. at 1642, remains appropriate even where the plan administrator is operating under a conflict of interest.

The Second Circuit, explained that the District Court, had decided to craft an exception to Firestone deference by holding that a court need not apply a deferential standard of review where the plan administrator has previously construed the plan terms and the court finds that the first interpretation violates ERISA. Under the Second Circuit's approach, a reviewing court would be entitled to reject a plan administrator's interpretation of the plan, even if reasonable, if that administrator's previous interpretation has been overturned.

The Supreme Court rejected what it characterized as the Second Circuit's “one-strike-and-you're-out” approach. Id. at 1643. First, the Court noted that the Circuit Court decision was inconsistent with the broad standard of deference established in Firestone, which was not susceptible to “ad hoc exceptions.” Id. As the Court pointed out, it had declined to create an exception to Firestone deference in Glenn, where it opted to maintain a deferential standard of review even in the face of a systemic conflict of interest.

Second, the Court found the Second Circuit's approach to be inconsistent with the principles that underlay its holdings in Firestone and Glenn: the terms of the plan under review, the principles of trust law, and the purposes of ERISA.

Terms of the Plan

Concerning the terms of the Plan, the Supreme Court noted that the Plan grants the Plan administrator the power to “[c]onstrue the Plan” and does not expressly limit that power to the first efforts to construe the plan. Id. at 1647.

Principles of Trust Law

The Supreme Court next examined the application of principles of trust law to the issue of a single honest mistake by a Plan administrator, and found trust law to be unclear. The Supreme Court cited treatises and cases maintaining that a court could control a trustee in his or her exercise of power if he or she acted beyond the bounds of reasonable judgment, but also cited sources maintaining that in the event a trustee makes a mistake but there is no basis to believe that the trustee will not fairly exercise his or her power, the court will not control the trustee; rather, the court will order that the trustee make a reasonable determination. The Supreme Court identified yet a third approach, pursuant to which a court faced with a trustee who committed an error would establish a range of maximum and minimum limits within which the trustee could render a decision.

Purposes of ERISA

The Supreme Court then instructed that while the principles of trust law did not supply an answer to the issue before the Court, the guiding purposes of ERISA did supply an answer. The Supreme Court noted that ERISA represents a “careful balancing” between “ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans. Id. at 1649. It was also noted that Congress sought to create a system that is not so complex that litigation and administrative costs would “unduly discourage employers from offering [ERISA] plans in the first place.” Id., citing, Varity Corp v. Howe , 516 U.S. 489, 497 (1996). The Court distilled these guiding purposes of ERISA into three principles: efficiency, predictability, and uniformity. Each of these principles, explained the Court, is served by Firestone deference:

Deference promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation. It also promotes predictability, as an employer can rely on the expertise of the plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review. Moreover, Firestone deference serves the interest of uniformity, helping to avoid a patchwork of different interpretations of a plan, like the one here, that covers employees in different jurisdictions. Id. at 1649.

Holding that the interests of ERISA law in efficiency, predictability and uniformity do not disappear “simply because a plan administrator has made a single honest mistake,” the Court held that the Second Circuit erred in holding that the District Court could refuse to defer to the Plan administrator's subsequent interpretation of the Plan following a single erroneous interpretation. Id.

Conclusion

With its decision in Conkright, the Supreme Court has reaffirmed that it is not open to creating exceptions to Firestone deference. The broad language used by the Court in reaffirming this principle (“Firestone ' set out a broad standard of deference without any suggestion that the standard was susceptible to ad hoc exceptions”) will likely inhibit circuit courts that are tempted to devise a carve-out to Firestone deference in situations not specifically covered by Glenn or Conkright.

Finally, it remains to be seen whether the decisions of Glenn and Conkright will alter the approaches of those circuit courts that apply a heightened standard of review when there is evidence of procedural irregularities in the administration of an ERISA plan. See, e.g., Nichols v. Prudential Ins. Co. of America , 406 F.3d 98 (2d Cir. 2005); Gatti v. Reliance Standard Life Ins. Co. , 415 F.3d 978 (9th Cir. 2005). It may be that those courts that apply heightened scrutiny in such circumstances will decide to move to a deferential standard, and approach the procedural irregularities as factors to consider when weighing whether the administrator abused his or her discretion. If those courts decide instead to continue applying heightened scrutiny in such circumstances, the Supreme Court may again find itself taking up the issue of Firestone deference.

Joseph Geoghegan is an associate and Dennis O. Brown is a partner in the Insurance and Reinsurance Department of Edwards Angell Palmer & Dodge LLP. They are based in the firm's Hartford office. Brown is a member of this newsletter's Board of Editors.