Oral argument: Jan. 20, 2009
Appealed from: United States Court of Appeals for the Second Circuit (July 24, 2008)
ERISA, PENSIONS, JUDICIAL REVIEW, ARBITRARY AND CAPRICIOUS
Courts generally give deference to discretionary decisions made by ERISA pension plan administrators. This case will test the limits of that deference and will decide if a court is obligated to defer to a plan administrator’s proposed remedy for an ERISA violation, when the cause of the violation itself was the administrator’s prior interpretation. Petitioners and their amici argue that allowing judges to involve themselves in ERISA pension plan determinations without deferring to decisions made by the plan administrator will increase the costs and uncertainty of maintaining pension plans. Respondents and their amici, on the other hand, argue that deferring repeatedly to a plan administrator will increase costs through more and prolonged litigation, and will be unfair to plan participants who justifiably rely on promised benefits to plan for retirement.
1. Whether the Second Circuit erred in holding, in conflict with decisions of this
Court and other Circuits, that a district court has no obligation to defer to an ERISA
plan administrator's reasonable interpretation of the terms of the plan if the plan
administrator arrived at its interpretation outside the context of an administrative
claim for benefits.
2. Whether the Second Circuit erred in holding, in conflict with decisions of other
Circuits, that a district court has "allowable discretion" to adopt any "reasonable"
interpretation of the terms of an ERISA plan when the plan interpretation issue
arises in the course of calculating additional benefits due under the plan as a result
of an ERISA violation.
Whether a district court must defer to an ERISA plan administrator’s proposed remedy for an ERISA violation, where the violation resulted from a prior interpretation by the plan administrator.
The Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., was originally enacted in 1974 to protect employees’ “justified expectations of receiving benefits that their employers promise them.” Frommert v. Conkright, 433 F.3d 254, 262 (2006). Respondents in this case are employees of the Xerox Corporation who left the company and were then subsequently rehired. See id. at 257. Each Respondent received from Xerox a lump sum distribution of their accrued retirement benefits after leaving the company. See id. The underlying dispute in this case involves the method that the Petitioners, Xerox retirement plan administrators, used to calculate Respondents’ final benefit package by offsetting the prior lump sum distributions. See id.
The facts of Respondent Frommert’s case are useful to illustrate the dispute. See Frommert, 433 F.3d at 261. Frommert worked at Xerox from 1960 to 1986, and received a lump sum distribution of $147,780. See id. He was subsequently rehired in 1989. See id. In 1989, the Xerox plan provided that “no credit shall be given for any period with respect to which a lump sum payment has been made,” but did not provide the method that the plan administrator would use to deduct this credit. See id. at 258.
In 1996, Frommert received a document indicating that his monthly benefit earned to date was over $2,000 a month, collectible at age 65. See Frommert, 433 F.3d at 261. Later that year, Frommert received another document indicating that after offsetting the value of his previous lump sum distribution, he was entitled to only $5 a month. See id. The plan administrator used a “phantom account” method to offset Frommert’s prior distribution, meaning that the prior distribution is placed into a hypothetical account and any investment gains are added to that value, which is then subtracted from the total earned benefits. See id. The phantom account method was not formally integrated into the Xerox plan until 1998. See id. at 260.
In 1999, Frommert and the other Respondents (“Beneficiaries”) sued Xerox and the Xerox Plan Administrators (“Plan Administrators”) in the Western District of New York. The district court granted summary judgment to Xerox and the Xerox Plan Administrators in 2004, holding that their decision to use the phantom account method was not arbitrary and capricious. See Frommert v. Conkright, 328 F.Supp. 2d 420, 433 (2004). The Western District of New York also held that the Plan Administrators did not violate ERISA requirements that they give employees notice of significant reductions in benefit accruals. See id. at 436. The Beneficiaries appealed to the U.S. Court of Appeals for the Second Circuit. The Second Circuit stated that it was unclear whether a de novo or arbitrary and capricious standard of review applied. See Frommert, 433 F.3d at 265-266. It found, however, that “under either an arbitrary and capricious standard or as a matter of law,” that the Plan Administrators’ use of the phantom account method was a violation of ERISA. See id. at 265-266. It remanded the case to the district court to fashion an appropriate remedy for the violation. See id. at 268.
The district court ordered the Plan Administrators to pay a lump sum in the amount of the difference between their total accrued benefits and the prior lump sum distribution, without any reference to phantom accounts or hypothetical investment gains. See Frommert, 472 F. Supp.2d at 458. Petitioners appealed, but lost; the Second Circuit affirmed the district court’s remedy. See Frommert v. Conkright, 535 F.3d 111, 118 (2008). The U.S. Supreme Court granted certiorari on June 29, 2009. See Docket No. 08-810.
The Supreme Court’s decision in this case is of great interest to both businesses that provide ERISA benefit plans, and employees who benefit from such plans. The Court will determine whether a court must defer to a plan administrator’s proposed remedy for an ERISA violation. It will also decide how much discretion a district court has in interpreting an ERISA plan, when the interpretation issue involves the granting of additional benefits after an ERISA violation. The crux of this case involves determining a level of judicial review that ensures that ERISA plans remain affordable and predictable enough for companies to continue to offer them, and protects employees’ reasonable expectations of the benefits they will receive as part of their employment agreements.
Petitioners-Plan Administrators argue that judicial deference to plan administrator interpretations of a pension plan will avoid unforeseen interpretations offered by courts that confer unexpected, unfunded liability on the employer. See Brief for Petitioners, Sally L. Conkright, et al. at 31. The Business Roundtable and Chamber of Commerce expect that greater court involvement in interpreting pension plans will result in divergent and irreconcilable interpretations of a single plan. See Brief of Amicus Curiae Business Roundtable, et al. in Support of Petitioners at 27. The Business Roundtable worries that different employees will be entitled to different benefits under the same plan based on which judicial district the employee resides in. See id. at 26-27.
The United States argues that the existence of divergent interpretations of a pension plans in different judicial districts can be remedied by plan administrators acting reasonably in the first instance, where courts always apply deference in reviewing a plan administrator’s decision. See Brief of Amicus Curiae United States of America in Support of Respondents at 22. The Beneficiaries add that allowing the Plan Administrators a second chance to interpret a pension plan, after a prior interpretation was held to be a violation of ERISA, would award ambiguity and make the promised benefits unpredictable from the employees’ point of view. See Brief for Respondents, Paul J. Frommert, et. al. at 53.
Petitioners-Plan Administrators argue that by not requiring that courts review plan administrator interpretations with deference, pension plans governed by ERISA will become too costly to maintain, and employers will stop offering them. See Brief for Petitioner at 30-31. The Business Roundtable argues that allowing non-deferential judicial interpretation will add to the already substantial litigation costs associated with offering an ERISA plan. See Brief of Business Roundtable at 32.
The ERISA Industry Committee (“Committee”) argues that the Second Circuit’s decision creates an incentive for employees to ‘shop around’ for a more participant-friendly interpretation of a pension plan, if their plan administrator does not offer an agreeable interpretation. See Brief of Amicus Curiae ERISA Industry Committee, et al. in Support of Petitioner at 6. The Business Roundtable argues that increased litigation costs combined with decreased predictability and unforeseen liabilities will make the maintenance of ERISA pension plans too costly for businesses to maintain. See Brief of Business Roundtable, et al. at 32. The Committee further contends that a decrease in voluntary pension plans would not only undercut the purposes of ERISA, but would undermine the interests of employees who benefit from the plans. See Brief of Committee at 11.
The Beneficiaries argue that “rerun deference” to the administrator’s interpretations would deprive retirees of much needed benefits because of potentially never-ending litigation. See Brief for Respondents at 52. If a court must always refer to a plan administrator’s reasonable interpretation, even after a prior interpretation has been struck down, the plan administrator can offer a limitless number of interpretations, the Beneficiaries argue. See id.
Richard C. Capone, former CEO of UBS AG, argues that “serial deference” creates a system that awards ambiguity and dishonesty, and penalizes transparency and fair dealing. See Brief of Amicus Curiae Robert C. Capone in Support of Respondents at 10. Serial deference, Capone argues, will encourage companies to offer vague, but excellent-sounding retirement packages to lure quality employees. See id. The Beneficiaries contend that employers that offer such ambiguous plans will always offer the least generous interpretation first, and will proceed with incrementally more generous interpretations until the court finally approves one. See Brief for Respondents at 53.
On the other hand, the Beneficiaries argue that allowing plan administrators only one chance to interpret a plan and receive judicial deference will encourage reasonable interpretations in the first instance, decreasing the costs of maintaining a plan and increasing fairness to plan participants. See Brief for Respondents at 53. In this sense, Capone argues, affirming the Second Circuit’s decision will encourage transparency and fair competition in the employment market, which is good for American business in general. See Brief of Richard Capone at 8.
Respondent-Beneficiaries brought suit against Petitioners-Pension Plan Administrators regarding a dispute over the benefits owed by Petitioners under the Xerox Corporation Retirement Income Guarantee Plan (the “Plan”), which is an ERISA plan. See Brief for Petitioner, Sally L. Conkright, et al. at 12; see Brief for Respondent, Paul J. Frommert, et al. at 10. In particular, the Beneficiaries are seeking relief from the reconstructed account methodology utilized by the Administrators of the Plan. See Brief for Petitioner at 12. At issue here is  whether a court should accord deferential review to the Administrator’s interpretation of the Plan, construed outside the context of an administrative claim for benefits and  whether the Court of Appeals for the Second Circuit applied the correct standard of review to the district court's decision regarding the appropriate interpretation of the Plan. See id.; see also Brief for Respondent.
The Deference Owed to an Administrator’s Interpretation of an ERISA Plan Outside the Context of an Administrative Claim for Benefits
The Plan Administrators, relying on the Court’s decision in Firestone Tire & Rubber Co. v. Bruch, argue that their interpretation of the Plan is entitled to deference. See Brief for Petitioner at 26. So-called “Firestone deference” directs reviewing courts to defer to an administrator’s interpretation of an ERISA plan when “the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” Id. at 26 (quoting Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989)). Furthermore, the Plan Administrators argue that although a conflict of interest—as where an employer funds the plan, evaluates the claims, and interprets the plan—is a factor for a reviewing court to consider when deciding whether to afford the administrator’s interpretation deference, it does not automatically strip the administrator of such deference. See id. at 27 (discussing the holding of Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct. 2343 (2008)). Thus, the Plan Administrators argue, there is nothing present in these circumstances that would prevent their interpretation of the Plan from receiving Firestone deference. See id. at 28.
The Beneficiaries argue that the Plan Administrators are not entitled to Firestone deference. See Brief for Respondent at 43. First, the Beneficiaries argue the issue on remand was the same issue that was determined in the initial proceedings. See id. Their position is that because the Second Circuit already determined—using a deferential standard of review—that the Administrators’ interpretation was an abuse of discretion in the first instance, the Administrators’ subsequent interpretations of the same issue are no longer entitled to any deference. See id. at 46 (referring to this as “re-run deference”).
The Plan Administrators respond by arguing that even if their initial interpretation was a mistake, they are still entitled to Firestone deference absent a showing of bad faith in making the mistake. See Brief for Petitioner at 38. The Plan Administrators argue that although the Second Circuit determined that the Administrator’s initial interpretation was erroneous due to a lack of proper disclosure, the court did not find that their interpretation was made in bad faith. See id. at 38. Pointing to the law of trusts, the Plan Administrators suggest that a court should strip them of deferential review only upon a finding of bad faith, which they urge is not present in this case. See id. at 39–42. Furthermore, the Plan Administrators argue that they did not simply interpret the same Plan terms on remand, but rather, offered an interpretation of the Plan without reference to the provision that the Second Circuit held could not be applied to Respondents due to inadequate disclosure. See id. at 50. Thus, they reject the Beneficiaries’ argument that they are simply asking the court to afford them “re-run deference.” See id.
The Beneficiaries further argue that allowing re-run deference in this case would undermine the objectives of ERISA, because one of the statute’s primary goals was to make the pension plan and its administration more transparent. See Brief for Respondent at 52. They state that requiring re-run deference would distort incentives by rewarding drafters of ambiguous plans and unclear interpretations. See id. at 52. The Beneficiaries suggest that allowing re-run deference will cause “employers [who sponsor clear plans to] lose employees to competitors who craft superficially appealing but ambiguous plans.” Id. Thus, the Beneficiaries argue that the Plan administrators are entitled “one guaranteed crack at an ambiguous issue” and no more. Id. at 53.
The Plan Administrators respond by arguing that requiring a deferential standard of review in this case will actually further ERISA’s objectives. See Brief for Petitioner at 28. They maintain that deference is afforded because it facilitates an employer’s delegation of administrative authority to individuals who deal with ERISA plans on a daily and continual basis and utilize their experience for the benefit of both the employer and the employee. See id. at 28. Furthermore, they argue that deference “promotes uniformity of plan interpretation and administration” and that failing to do so could lead to disparity of treatment of the beneficiaries of the same ERISA plan. Id. at 30. Thus, they argue, to further the objectives of ERISA, the Court should afford the Administrator’s interpretation of the Plan deference. See id. at 30.
The Correct Standard of Review of a District Court’s Determination of the Appropriate Interpretation of an ERISA Plan
The Beneficiaries argue that Second Circuit correctly applied an abuse of discretion standard of review in affirming the district court's determination of the appropriate construction of the Plan. See Brief for Respondent at 58. In so arguing, the Beneficiaries argue that the point of remand was to afford procedural fairness by allowing both sides to present extrinsic evidence to determine the appropriate offset. See id. at 60. They argue that the district court was simply trying to ascertain the meaning of ambiguous written terms, which they suggest involves a discretionary determination. See id. at 61. Thus, they argue that an abuse of discretion standard of review is appropriate. See id.
The Plan Administrators argue, however, that appellate courts should not simply defer to a district court's interpretation of an ERISA plan. See Brief for Petitioner at 53. First, the Plan Administrators point to Firestone, which they argue held that a denial of benefits challenged should be reviewed under a de novo standard. See id. at 55. Although the posture of this case is a little different, insofar as the district court was charged with fashioning a remedy, the Plan Administrators argue that nonetheless, lower courts are not entitled to deference when they are interpreting written instruments. See id. at 56. They argue that by not using a de novo standard of review, the Second Circuit would have to affirm the inconsistent interpretations by different district courts of the same plan so long as they were within the zone of allowable discretion. See id. at 57-58.
The Beneficiaries argue that even if the Second Circuit applied a de novo standard of review, the district court would still have been affirmed, because its approach was the most reasonable interpretation of the Plan. See Brief for Respondent at 62. They argue that the district court's approach is the most straightforward and natural reading of the Plan, and that the Plan Administrator’s interpretation is indefensible, because it relies on faulty assumptions and possesses the same problems regarding disclosure as the initial interpretation. See id. at 65. Thus, they conclude that even if the Second Circuit used the wrong standard of review, any error was harmless. See id. at 62.
This case will have a significant impact on pension plans governed by ERISA. If the Court rules in favor of Petitioners, employers may have an incentive to draft ambiguous plans and subsequently apply the least generous interpretation. Such a situation could lead to increased litigation at the expense of the most vulnerable beneficiaries. On the other hand, if the Court favors the Respondent, there is a concern that employers will be subject to inconsistent interpretations of the same pension plan, making it difficult for them to accurately project future financial liabilities. Thus, employers may come to view pension plans as too costly and uncertain, and consequently they could decline to offer such retirement benefits to their employees at all.
Edited by: Lucienne Pierre
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