When a corporation’s summary plan description and actual retirement benefit plan are inconsistent, is the proper standard for measuring harm a standard of “likely harm” rebuttable by the defendant after a showing of “harmless error,” or must a plaintiff show “detrimental reliance” on the inconsistency?
CIGNA Corporation changed its employee retirement plan from a traditional defined benefits plan to a cash balance plan. Under the Employee Retirement Income Security Act (“ERISA”), companies that change their retirement plan must release a summary plan description (“SPD”) that outlines the changes for employees in a manner that the average employee can understand. CIGNA released an SPD that described the change but did not mention a “wear-away” period during which the enrolled employees would continue earning credits under the plan while their minimum benefit would remain the same for a period of time. The Respondents, current and former CIGNA employees, sued in federal court, alleging that the inconsistency between the SPD and the actual benefit plan violated ERISA. The district court found for the plaintiffs, using a standard of “likely harm” to determine whether the employees were harmed by the inconsistency between the SPD and the original plan, and the Second Circuit affirmed. CIGNA appealed, arguing that a showing of “detrimental reliance” on the part of the employees is required before they can receive a remedy. The Court’s decision will likely affect the contents of SPDs and the availability of pension benefit plan class actions.
Questions as Framed for the Court by the Parties
Whether a showing of "likely harm" is sufficient to entitle participants in or beneficiaries of an ERISA plan to recover benefits based on an alleged inconsistency between the explanation of benefits in the Summary Plan Description or similar disclosure and the terms of the plan itself.
Respondents, Janice C. Amara and others (collectively “Amara”), are current and former employees of CIGNA Corporation. Until January 1, 1998, CIGNA’s retirement plan consisted of a traditional defined benefit pension plan, which provides each employee with an annuity—an annual benefit payable throughout his life. The annuity is based on a certain percentage of the employee’s salary multiplied by his years of employment. Effective January 1, 1998, CIGNA converted to a “cash balance” plan, which allocates the employee’s retirement in a hypothetical account that accrues benefits in credit form. Employees hired before December 31, 1997, excluding certain older or longer-service employees, became participants in the “cash balance” plan (“Part B”) They received a Part B opening account based on the value of their accrued benefits under the traditional defined benefit plan (“Part A”). Under the terms of Part B, employees would ultimately receive the greater benefit between a “minimum benefit,” an annuity based on a Part A accrued benefit, and a Part B accrued benefit.
Employees who participated in Part B did not know that the calculation formula used for Part B’s opening balance led to periods when the Part B accrued benefit was less than the employee’s “minimum benefit.” This resulted in a phenomenon called “wear away,” where an employee continued to receive credits under Part B but his retirement account balance did not increase beyond the “minimum benefit” earned as of December 31, 1997.
From 1997 through 1999, CIGNA informed employees about the transition to Part B in multiple newsletters and Summaries of Material Modifications (“SMM”), which CIGNA called a retirement kit. The 1997 newsletter stated that Part B will “significantly enhance” the employees’ retirement program. . In October 1998, CIGNA issued a Summary Plan Description (“SPD”) for Part B. Both the SMM and the SPD are documents that inform employees of their rights and obligations under the pension plan. The SPD did not mention or explain “wear away,” but it did state that employees would never receive less than the minimum benefit.
Respondents are employees who first participated in CIGNA’s Part A and later converted to Part B. In 2001, Amara filed a class action against CIGNA in the United States District Court for the District of Connecticut claiming that CIGNA violated the Employee Retirement Income Security Act of 1974 (“ERISA”). The district court held that CIGNA did not meet ERISA standards because it failed in its duty to inform Amara about the possibilities of a “wear away” effect regarding Part B. The court found that CIGNA in fact issued misleading statements that made employees reasonably believe that they would immediately begin accruing benefits under Part B.
The district court also held that Amara is entitled to receive benefits because a plaintiff who brings a claim under ERISA is entitled to relief if she meets the burden that the deficient SPD caused “likely harm.” The court explained that an employer can rebut through evidence that the SPD was in effect a harmless error. The district court rejected the rule that a plan participant must show that she detrimentally relied on the SPD. The United States Court of Appeals for the Second Circuit affirmed the district court’s ruling. The Supreme Court granted certiorari to decide whether a plan participant must show “likely harm” or “detrimental reliance” in order to receive relief when the SPD is inconsistent with the actual retirement plan.
This case turns on whether the Employee Retirement Income Security Act of 1974 (“ERISA”) requires a class of employees to show detrimental reliance on the information provided by their employer in the Summary Plan Description (“SPD”) or whether a lower standard of likely harm is required when the original plan and SPD are in conflict regarding retirement benefits.
Plain Meaning of Statute
CIGNA Corporation contends that ERISA does not create a clear cause of action, and that a showing of detrimental reliance is required for a class of employees to recover based on inconsistencies between the SPD and the original benefit plan. Section 1022 of ERISA requires companies to write SPDs in a manner that could be understood by the average plan participant and reasonably apprises participants of their rights under the plan. CIGNA argues that the SPD does not create or confer rights for the participants; it merely informs them of their existing rights under the original plan. CIGNA contends that because the SPD cannot change the rights of the participants under the plan, participants can only be injured by a contradiction between the SPD and the original plan if they read and rely on the SPD.
Respondent Amara points to the same language in Section 1022 of ERISA to show that Congress intended there to be an objective standard of harm as opposed to a subjective inquiry of harm for each participant. Amara argues that language such as “average participant,” “reasonably apprise,” and “material modifications” supports an objective, rebuttable standard of likely harm. Amara contends that Congress has included a requirement of detrimental reliance in other statutes such as in the Securities Exchange Act; had Congress intended it to be used here, it would have included an explicit requirement of detrimental reliance. ERISA limits the types of damages recoverable by explicitly disallowing recovery of consequential and punitive damages. Amara insists that this shows that Congress has compromised on defining the standard of relief and absence of an explicit reliance is to be understood as intentional.
Common Law Principles
CIGNA notes that when a statute is not explicit, courts often use common law principles to fill gaps left by Congress or administrative agencies. It contends that applicable common law principles support the requirement of detrimental reliance. It argues that the closest common law cause of action analog would be negligent or fraudulent misrepresentation and both causes of action require detrimental reliance for recovery. CIGNA argues that when courts have found that detrimental reliance was not required it was normally based on contract theory. CIGNA continues that courts that don’t require detrimental reliance treat the SPD as an instrument capable of superseding and modifying the original plan. CIGNA argues that the SPD is not capable of modifying the original plan and therefore is more analogous to a gratuitous promise. Under contract theory, gratuitous promises require a showing of detrimental reliance for recovery.
Amara answers by saying that CIGNA’s comparison of an SPD to a gratuitous promise is inappropriate because of the nature of the relationship between the plan administrator and the employees. Amara argues that previous Supreme Court cases have found that retirement benefits are not an abstract promise, but actual consideration that is exchanged for labor provided by the employee. Amara argues that the guarantee of future retirement benefits are therefore more analogous to a standard contract and under traditional contract theory, a showing of detrimental reliance is not required. Amara continues that if the court believes that the common law cause of action of misrepresentation is more analogous, the court is bound by previous case law and may not impose requirements not supported by the text of the statute or administrative decisions.
Workability of Proposed Standards
CIGNA argues that “workability” of a particular legal standard should be a factor in the court’s decision. CIGNA contends that putting the burden of proving the plaintiff’s state of mind on the defendant is unfair because of the inherent difficulty of proving a negative. It argues that to rebut a finding of likely harm, a company would have to show that the plaintiffs would not have attempted to challenge the change in the original plan in any way had they known about the inconsistency between the SPD and the original retirement benefits plan. The detrimental reliance standard, CIGNA argues, is the opposite in that it only requires harmed individuals to testify to a few simple facts. CIGNA also argues that the adoption of a likely harm standard would create virtual strict liability for companies that provide retirement plans and make mistakes in their SPDs which will ultimately have the effect of reducing the amount of companies that provide retirement plans. CIGNA asserts that thousands of employees that did not rely upon or even read the SPD could receive a windfall under the likely harm standard.
CIGNA contends that the main purposes of ERISA are to protect employees’ retirement plans and to promote efficiency in plan administration. CIGNA argues that a standard of likely harm would harm these goals by threatening the “actuarial soundness” of these retirement plans. Employees who fulfill the requirements of the plan and would not be affected by the change adopted by CIGNA could nevertheless be harmed by a class-wide lawsuit. CIGNA argues that the court should balance the potential harm to retired employees with the rights of the current employees affected by the change and adopt a detrimental reliance standard.
Amara responds that if the court does adopt the detrimental reliance standard proposed by CIGNA, it would place too great a burden on the plaintiffs. As a practical matter, Amara argues that the individual testimony of even a fraction of the class of plaintiffs would take years and will result in class action suits not being brought when a company misleads its employees on a massive scale. Further, Amara argues that the standard of likely harm fulfills the congressional intent of protecting employees from being misled on a massive scale regarding their retirement benefits and then having no remedy in the judicial system.
Amara argues that Congress enacted the statute primarily to protect workers from courts that focused too much on the technical language in the original plan. Amara argues that the SPD is the primary means of communicating the original plan terms to the beneficiaries because it is statutorily required to be understandable by the beneficiaries and to be given to all beneficiaries free of charge, while the original plan is only available upon request. Amara continues that the SPD should therefore not be treated as a gratuitous promise and it should control in cases where it conflicts with the original plan. Amara also responds to CIGNA’s claim that the likely harm standard would result in virtual strict liability by arguing that there are many ways in which a SPD can be mistaken or misleading without it resulting in employer liability. In cases where ERISA doesn’t require a certain level of detail, where the employee knows of the conflict, or where the mistake is fixed in a timely manner, the employer has been found not liable.
The Supreme Court’s decision will determine a plan participant’s standard of injury in order to recover against an employer that has allegedly issued a Summary Plan Description (“SPD”) that is inconsistent with the actual retirement plan. CIGNA argues that a plan participant must prove that she detrimentally relied on the SPD in order to receive relief based on inconsistencies between SPD’s terms and the actual plan. On the contrary, Janice Amara argues that a plan participant can receive relief if there is an objective material conflict between the SPD’s terms and the actual plan. According to Amara, even if a participant needs to show possible prejudice or likely harm, the standard is an objective standard of possible prejudice or likely harm on a reasonable plan participant. .
CIGNA argues that if the Supreme Court applies a “likely harm” standard to grant relief to plan participants it would open the door to grant relief to people who never even read the SPDs nor detrimentally relied on them. CIGNA contends that the “likely harm” standard in practice acts like a strict liability standard against employers because it is hard for employers to meet the burden of proof to show that none of the plaintiffs were injured by the inconsistent information in the SPD.
CIGNA asserts that if the Supreme Court allowed every plan participant to benefit from an error in an SPD, regardless of whether she read the SPD or not, it would threaten the plan’s financial stability; increased litigation would force employers to compensate for underfunded pension plans, plan funds could be cut back, employees could have less frequent wage increases, and there could be benefit reductions. Furthermore, CIGNA argues that under the “likely harm” standard, the increased litigation costs will discourage employers from creating pension plans in the first place, and force employers with pension plans to suspend them. According to CIGNA, the “likely harm” standard will also cause employers to create lengthy and complex SPDs in order to prevent possible inconsistencies with the plan and possible lawsuits against the employers. CIGNA asserts that lengthy and complicated SPDs go against ERISA’s policy goal of providing plan participants with short, simple, and understandable descriptions of their plans.
CIGNA asserts that the “detrimental reliance” standard furthers ERISA’s policy goal of creating a stable and sound benefit plan by protecting employers from damaging litigation costs. CIGNA further argues that the “detrimental reliance” standard prevents employers from creating dense and esoteric plan descriptions. According to CIGNA, this furthers ERISA’s purpose to encourage plan participants to know and enforce their rights under their plans.
In contrast, the United States argues that the lower court’s “likely harm” standard furthers ERISA’s purpose of ensuring that plan participants receive the benefits that the plan promised to them. The United States explains that an SPD is the only document that every employee receives regarding her benefit plan, so it is fair that the “likely harm” standard presumes that the plan participants are informed about the plan only in terms of the benefits promised in the SPD. The United States argues that this will also encourage employers to create SPDs that are accurate and detailed so that plan participants fully understand their rights and obligations under the plan.
The National Employment Lawyers Association, the Pension Rights Center, and United Policyholders (collectively “NELA”) argue that requiring plan participants to show detrimental reliance will make it nearly impossible for participants to receive relief. NELA argues that the detrimental reliance standard would likely discourage plan participants from bringing a large class action suit such as the present one because the court would most likely refuse to certify such a large class; even if the lower court certified a class action, records of testimonies by each participant regarding his detrimental reliance would overwhelm the trial court. NELA further argues that it is unlikely that individual plan participants would file individual pension lawsuits because it is not cost-effective.
The AARP also argues that the detrimental reliance standard would unfairly allocate the burden of proof on the plan participants. According to the AARP, it is difficult for an average plan participant to understand the SPD, a highly financially technical document. The AARP contends that it is unrealistic for plaintiffs to meet CIGNA’s standard because they will need to prove that they fully understood the SPD, that certain provisions were inaccurate or misleading, and that they would have acted differently if the plan disclosure were accurate.
The Supreme Court’s decision on the plan participant’s legal standard of injury is likely to shape the litigation strategies of employees under benefit plans, as well as affect the level of detail and accuracy that an employer must include in its SPD.
In CIGNA Corp. v. Amara, the Supreme Court will determine the plaintiff’s standard of injury under ERISA if he wants to recover benefits due to a deficient Summary Plan Description (“SPD”) that is inconsistent with the actual pension benefit plan’s terms. CIGNA argues that a plan participant must show that he detrimentally relied on the deficient SPD in order to recover benefits. Amara argues that a plan participant can recover benefits if there is a material conflict between the SPD and the actual plan. Amara asserts that when the SPD is deficient but there is no material conflict with the actual plan, the standard is whether there is possible prejudice to an average plan participant. The Supreme Court’s decision may give deference to the plan participants who bring a claim against their employers by setting a “likely harm” standard of injury or allocate a higher burden of proof on them by setting a “detrimental reliance” standard. The decision will affect pension benefit class action suits brought against employers as well as direct the level of care and attention employers devote to the contents of the SPDs.
· United States Department of Labor: Employee Retirement Income Security Act
· Society for Human Resource Management, Allen Smith: Supreme Court Will Review ERISA Plaintiffs' Showing in Summary Plan Description Case (July 7, 2010)
· Richard Glass: Is It Time to Re-Examine What it Means to Fulfill Your 401(K) Fiduciary Responsibilities? (Mar. 10, 2008)