james p. baker emily l. garcia-yow ginny m. aldajani ... · erisa litigation in 2014 reﬂ ects...

383

CHAPTER 19

ERISA

James P. BakerEmily L. Garcia-YowGinny M. Aldajani (Paralegal)

Baker & McKenzie LLPTwo Embarcadero Center, 11th FloorSan Francisco, CA 94111(415) [email protected]@bakermckenzie.comginny.aldajani@bakermckenzie.comwww.bakermckenzie.com

ABA_AR15_Chapter 19.indd 383ABA_AR15_Chapter 19.indd 383 3/26/2015 4:10:32 PM3/26/2015 4:10:32 PM

384

CHAPTER 19

Contents

§ 19.1 Forty Years After. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385§ 19.2 Supreme Court Update: The ERISA Plan Sponsor Can

Now Control the Game Clock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386§ 19.2.1 Practical Implications for Plan Sponsors and Employers. . . . . . 387

§ 19.3 Supreme Court Update: The Day the ERISA Presumption of Prudence Died . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388§ 19.3.1 What Was the Presumption of Prudence?. . . . . . . . . . . . . . . . . . 388§ 19.3.2 Statutory Construction Sinks the “Presumption of Prudence” . . 389§ 19.3.3 Claims Based on Publicly Available Information. . . . . . . . . . . . 390§ 19.3.4 Claims Based on Nonpublic Information . . . . . . . . . . . . . . . . . . 391§ 19.3.5 Federal Securities Law and Other Fact-Specifi c

“Plausibility” Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391§ 19.3.6 Circuit Courts Update: In the Wake of Dudenhoeffer, the

Ninth Circuit Doubles Down on Its Decision to Revive Stock Drop Class Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392

§ 19.4 Circuit Courts Update: ERISA Trumps State Mandated PTO Benefi ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396§ 19.4.1 ERISA Preemption Lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397§ 19.4.2 Next Steps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397

§ 19.5 ERISA Litigation Trends: Be Careful What You Wish For, the Affordable Care Act Is Now Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398§ 19.5.1 ACA Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398§ 19.5.2 ACA Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399§ 19.5.3 The Peculiar Whistleblower Penalty . . . . . . . . . . . . . . . . . . . . . 400§ 19.5.4 Business Reorganizations and the ACA . . . . . . . . . . . . . . . . . . . 401§ 19.5.5 Supreme Court Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401§ 19.5.6 ERISA Section 510 Primer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402§ 19.5.7 Courts Do Not Uniformly Apply the Same Analysis . . . . . . . . . . . 403§ 19.5.8 Courts Disagree about What Constitutes an Inquiry or Proceeding . . 404§ 19.5.9 Section 510 and the Statute of Limitations. . . . . . . . . . . . . . . . . 408§ 19.5.10 Conclusion: Look Before You Leap . . . . . . . . . . . . . . . . . . . . . . 409

§ 19.6 ERISA Litigation Trends: The Newest Wave, Out-of-Network Service Provider Lawsuits . . . . . . . . . . . . . . . . . . . . . . 410§ 19.6.1 Saga of No Assignment Clauses in ERISA Plans. . . . . . . . . . . . 412§ 19.6.2 Attempts to Circumvent Plan-Based

Anti-Assignment Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 413§ 19.6.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416

§ 19.7 ERISA Litigation Trends: New ERISA Class Action Lawsuits Challenge Church Plan Status. . . . . . . . . . . . . . . . . . . . . . . . . 416


385

CHAPTER 19

ERISA

§ 19.1 Forty Years After

When Congress passed ERISA in 1974, skyrocketing medical plan costs were not even on the horizon. Congress instead was responding to a public outcry that arose during the 1960s and 1970s that many pension plan sponsors were either crooks, charlatans, or worse. 1974 U.S. Code Congressional & Administrative News 4670, 4680 (citing the Studebaker Shutdown).1

Determined to protect employees’ defi ned benefi t retirement benefi ts, the ERISA statute devised rules concerning vesting, accrual, funding participation, reporting, disclosure, and fi duciary responsibility to keep plan sponsors on the up and up. Employee benefi t plans were divided by the ERISA statute into two worlds: (1) pension benefi t plans, and (2) welfare benefi t plans. Pension plans were defi ned to include retirement plans or other plans that defer the receipt of income to termination of employment or beyond. 29 U.S.C. § 1002(2). Welfare plans include everything else, such as medical, dental, vision, life, disability, funded vacation, and virtually any other employee benefi t plan that is not related to “retirement.” 29 U.S.C. § 1002(1).

ERISA was a child of its time. It was enacted, in large part, to protect a worker’s defi ned benefi t pension plan benefi ts. Unfortunately, times and employee benefi ts have changed. ERISA assumed that employers would continue to choose to offer lifetime annuity pension benefi ts for their workers. They didn’t. Most workers in the United States do not have traditional defi ned benefi t pension plans. Instead, they have 401(k) plans. Congress enacted IRC § 401(k) in 1978, four years after the passage of the ERISA statute. Both ERISA and the Department of Labor that enforces ERISA have not really kept pace with this sea change in economic models.

ERISA litigation in 2014 refl ects this sea change. Both ERISA-related decisions by the U.S. Supreme Court during this term concerned 401(k) plans. The Supreme Court decisions were a mixed bag for ERISA defense lawyers.

1. On December 9, 1963, Studebaker Corporation announced it was closing its automobile factory in South Bend, Indiana. The closing of the South Bend plant caused 5,000 workers to lose their jobs in addition to the 2,000 workers that had already been let go. When the South Bend plant closed, the United Automobile Workers Union and Studebaker entered into an agreement terminating the workers’ retirement plan. The net result of that agreement was that the vast majority of workers received little or no retirement benefi ts.


386 Recent Developments in Business and Corporate Litigation, 2015 Edition

In one case, the Supreme Court decided that a plan-based statute of limitations provision could be enforced. In the second case, the Supreme Court decided that the judicially created “presumption of prudence” enjoyed by fi duciaries concerning investments in company stock had no basis in ERISA’s statutory language.

§ 19.2 Supreme Court Update: The ERISA Plan Sponsor Can Now Control the Game Clock

Those of us who are sports fans know that timekeepers can control the outcome of any football game. On December 16, 2013, the U.S. Supreme Court announced that an ERISA plan’s own statute of limitations will be enforced unless the time period specifi ed is “‘unreasonably short’ or ‘[where] a controlling statute’ prevents the limitations provision from taking effect.” Writing for a unanimous court, Justice Clarence Thomas concluded: “Neither condition is met here.” Heimeshoff v. Hartford Life & Accident Insurance Co., No. 12-729, 571 U.S. ___, 134 S. Ct. 604 (2013).

Julie Heimeshoff fi led her fi rst claim for long-term disability (“LTD”) plan benefi ts on August 22, 2005. The LTD plan stated that the last date for fi ling lawsuits about LTD benefi t claims was three years from the date that proof of loss was required to be submitted under the terms of the plan. Hartford Life denied her August 2005 claim in November 2005 because she had failed to submit a satisfactory proof of loss.

In October 2006, Heimeshoff submitted a proof of loss with her claim. Hartford retained an independent physician to review her claim and determined in November 2006 that she was not eligible for long-term disability benefi ts. Heimeshoff appealed. Hartford retained two additional doctors to review her appeal and, based on their recommendation, issued a fi nal denial on November 26, 2007. Almost three years later—and more than three years after her proof of loss was due—Heimeshoff fi led a federal lawsuit.

Hartford moved to dismiss Heimeshoff’s claim because she fi led her lawsuit more than three years after her proof of loss had been fi led with the plan. The district court granted Hartford’s motion to dismiss, and the Second Circuit affi rmed. The Circuit Courts of Appeal had been in confl ict over the accrual time for ERISA statutes of limitations, with certain circuits prohibiting limitations periods that begin running before a legal claim has accrued and other circuits upholding such limitation periods.

On appeal, the Supreme Court considered when a statute of limitations should accrue for judicial review of an ERISA disability-adverse benefi t determination. The plan’s own statute of limitations was enforced because the Supreme Court views ERISA plans as contractual arrangements:


Volume 2: ERISA, § 19.2 387

The principle that contractual limitations provisions ordinarily should be enforced as written is especially appropriate when enforcing an ERISA plan. “The plan, in short, is at the center of ERISA.” US Airways Inc. v. McCutchen, 569 U.S. ___, ___ (2013) (slip op., at 11). “[E]mployers have large leeway to design disability and other welfare plans as they see fi t.” Black & Decker Disability Plan v. Nord, 538 U.S. 822, 833 (2003). And once a plan is established, the administrator’s duty is to see that the plan is “maintained pursuant to [that] written instrument.” 29 U.S.C. § 1102(a)(1). This focus on the written terms of the plan is the linchpin of “a system that is [not] so complex that administrative costs, or litigation expenses, unduly discourage employers from offering [ERISA] plans in the fi rst place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996).

Heimeshoff’s cause of action for benefi ts is likewise bound up with the written instrument. ERISA section 502(a)(1)(B) authorizes a plan participant to bring suit “to recover benefi ts 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 benefi ts under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B). That “statutory lan-guage speaks of ‘enforc[ing]’ the ‘terms of the plan,’ not of changing them.” CIGNA Corp. v. Amara, 563 U.S. ___, ___ (2011) (slip op., at 13).

In determining that the limitations period at issue was not unreasonably short, the Supreme Court noted that applicable regulations indicate most claims should be resolved within a one-year time period. Here, the plan’s administrative review process required more time than usual but still left Heimeshoff with approximately one year to fi le suit, which the justices found to be a “reasonable” period of time.

§ 19.2.1 Practical Implications for Plan Sponsors and EmployersERISA plan sponsors should consider adopting plan-based statutes of • limitations.

If you decide to include a contractual limitations provision in your plan, • we recommend that you defi ne when a lawsuit must be fi led and make sure that the limitation is imposed in the plan, in the summary plan description, and in any communications with the participant.

While the U.S. Supreme Court’s decision applies to claims for plan • benefits under ERISA section 502(a)(1)(B), it does not apply to breach of fi duciary duty claims, for which ERISA provides a statute of limitations.



§ 19.3 Supreme Court Update: The Day the ERISA Presumption of Prudence Died

Unlike the song “American Pie,” I doubt if anyone will pen a song lamenting the passing of ERISA’s presumption of prudence. In a unanimous decision, on June 25, 2014, the U.S. Supreme Court rejected the “presumption of prudence” afforded to ERISA Employee Stock Ownership Plan (ESOP) fi duciaries hold-ing company stock. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ____, 134 S. Ct. 2459 (2014) (“Dudenhoeffer”). The disappearance of the “presumption of prudence” means plaintiffs must plausibly allege imprudence by a plan fi duciary charged with investment authority. The Supreme Court opined that a successful complaint should “allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fi duciary…. would not have viewed as more likely to harm the fund than help it.” ERISA plaintiffs’ lawyers thus have a new hill to climb—framing ERISA fi duciary breach claims that comport with the insider trading restrictions contained in federal securities laws.

§ 19.3.1 What Was the Presumption of Prudence?The Enron plaintiffs alleged the bad conduct by Jeffrey Skilling and other insiders doomed the $1.3 billion Enron stock held by employees in Enron’s 401(k) plan. The average Enron 401(k) plan participant held more than half of his or her account balance in Enron stock. The Enron defendants fi led an unsuccessful motion to dismiss arguing that their retention of Enron stock as it tumbled into bankruptcy was entitled to a “presumption of prudence.” In re Corp. Sec., Derivatives & ERISA Litigation, 284 F. Supp. 2d 511, 534 n.3 (S.D. Tex. 2003). Ultimately, Defendants’ Motion to Dismiss was denied. The bad conduct at Enron allowed plaintiffs to recover $442 million in settlement on behalf of Enron’s 401(k) plan participants.

The fi rst court to consider whether it was prudent for an ERISA pension plan fi duciary to hold onto a failing company’s stock was the Third Circuit in Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). The Moench court considered whether the precipitous decline in the market value of Statewide Bancorp common stock held in an ESOP from $18.25 per share to $0.25 per share over a two-year period constituted a breach of fi duciary duty under ERISA. An ESOP is a type of pension plan categorized under ERISA as an “Eligible Individual Account Plan.” (“EIAP”). 29 U.S.C. § 1107(d)(3)(A). EIAPs include 401(k) plans and stock bonus plans that invest in company stock. Edgar v. Avaya, Inc., 503 F.3d 340, 347 (3d Cir. 2007). The District Court granted defendant Statewide ESOP Committee’s motion for summary judgment. It found that the pension plan’s language did not give Statewide’s fi duciaries any discretion in retaining employer stock. Moench, 62 F.3d at 560. On appeal, the Third Circuit



reversed. It remanded the case and instructed the district court to determine whether “an ESOP fi duciary who invests the [ESOP’s] assets in employer stock is entitled to a presumption that it acted consistently with ERISA” in doing so. Id. at 571. In so ruling, ERISA’s “presumption of prudence” was born. After the Third Circuit’s decision in Moench, every Circuit Court of Appeals that considered this same issue adopted the Moench presumption. For example, the Ninth Circuit has said that to “overcome the presumption of prudent investment, plaintiffs must … make allegations that ‘clearly implicate[] the company’s viability as an ongoing concern’ or show ‘a precipitous decline in the employer’s stock … combined with evidence that the company is on the brink of collapse or is undergoing serious mismanagement.’” Quan v. Computer Sciences Corp., 623 F.3d 870, 882 (9th Cir. 2010).

§ 19.3.2 Statutory Construction Sinks the “Presumption of Prudence”

Pension plan fi duciary breach claims arise when the company experiences misfortune from product failures, business reversals, or reporting bad results. Misfortune for a public company usually translates into a swift stock price decline. After securities fraud class action claims are fi led in connection with these business mishaps, a tag-along ERISA “stock drop” class action is often fi led. The ERISA stock drop class action alleges that pension plan fi duciaries, who are usually company insiders, violated their fi duciary duties by failing to disclose the bad news to the public, failing to use the bad news to sell employer stock held by the pension plan, or failing to appoint an independent fi duciary at the time the business mishap occurred. In Fifth Third Bancorp v. Dudenhoeffer, Case No. 12-751, 573 U.S. ___, 134 S. Ct. 2459 (2014), the Supreme Court ruled that ERISA “does not create a special presumption favoring ESOP fi duciaries. Rather, the same standard of prudence applies to all ERISA fi duciaries, including ESOP fi duciaries, except that an ESOP fi duciary is under no duty to diversify the ESOP’s holdings.” Slip op. at 8.

The Supreme Court acknowledged that eliminating the “presumption of prudence” places an ESOP fi duciary:

between a rock and a hard place: If he keeps investing and the stock goes down he may be sued for acting imprudently in violation of § 1104(a)(1)(B), but if he stops investing and the stock goes up he may be sued for disobeying the plan docu-ments in violation of § 1104(a)(1)(D).

At the same time, we do not believe that the presumption at issue here is an appropriate way to weed out meritless lawsuits or to provide the requisite “balancing.” The proposed pre-sumption makes it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer is in very bad economic circumstances. Such a rule does not readily divide the plausible sheep from the meritless goats.



That important task can be better accomplished through careful, context-sensitive scrutiny of a complaint’s allegations.

Id. at 14-15.Fifth Third’s primary argument that ESOPs have a special purpose—to

advance employee ownership of companies—was rejected out of hand. Those words cannot be found in the ERISA statute. The Supreme Court could not fi nd that:

[T]he content of ERISA’s duty of prudence varies depending upon the specifi c nonpecuniary goal set out in an ERISA plan.

Id. at 10.Second, the Supreme Court rejected Fifth Third’s argument that the words of

the pension plan document overrode the statutory duty of prudence, explaining “trust documents cannot excuse trustees from their duties under ERISA.” Citing Central States, Southeast & Southwest Areas Pension Fund, 472 U.S. 559, 568; see also 29 U.S.C. §§ 1104(a)(1)(D) and 1110(a). Id. at 12.

§ 19.3.3 Claims Based on Publicly Available Information

Fifth Third’s fi nal argument that plaintiffs’ complaint would cause ERISA fi duciaries to violate federal securities laws by trading company stock based on insider information was much better received. The Supreme Court observed that Fifth Third’s concern was “a legitimate one.” Id. at 13. It stated, “Surely a fi duciary is not obligated to break the insider trading laws even if his company is about to fail.” Id. Although the Supreme Court rejected applying the presumption of prudence based upon this potential “insider trading” problem, the Supreme Court explained that plaintiff’s theory of liability foundered in the face of the fact that ERISA fi duciaries cannot break securities laws and trade on the basis of insider information. In doing so, the Supreme Court expressly embraced the “effi cient market” theory of liability:

In our view, where a stock is publicly traded, allegations that a fi duciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible under a general rule, at least in the absence of special circumstances. Many investors take the view that “they have little hope of out performing the market in the long run based solely on their analysis of publicly available information,” and accordingly they “‘rely on the security’s market price as an unbiased assessment of the security’s value in light of all public information.’” Halliburton v. Erica P. John Fund, Inc., ____ U.S. ____, ____ 2014 BL 172975 (2014) (slip op., at 11-12).

Id. at 16.



In remanding the case, the Supreme Court signaled that plaintiff’s insider trading claim may well yet be doomed at the Motion to Dismiss stage:

The Court of Appeals did not point to any special circumstance rendering reliance on the market price imprudent. The court’s decision to deny dismissal therefore appears to have been based on an erroneous understanding of the prudence of relying on market prices.

Id. at 17-18.

§ 19.3.4 Claims Based on Nonpublic InformationThe alternate theories of liability advanced by the Fifth Third plaintiffs also appear to be in jeopardy. First, plaintiff’s allegation that the Fifth Third ERISA fi duciary should have used insider information to sell the ESOP’s holdings of Fifth Third stock appears to be a nonstarter. The Supreme Court pointedly observed that ERISA “does not require a fi duciary to break the law.” Id. at 18.

Plaintiff’s other theory that Fifth Third’s insider should have stopped buying Fifth Third stock when the stock price was falling also appears to be on thin ice:

The courts should consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could confl ict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws.

Id. at 19.The Supreme Court also noted that stopping purchases by the ESOP’s

fi duciaries could also “do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” Id. at 20.

§ 19.3.5 Federal Securities Law and Other Fact-Specific “Plausibility” Problems

While plaintiffs may have won the battle of the “presumption of prudence,” they still face a new challenge in trying to stake a claim that passes muster under federal securities law. The factual allegations in a complaint must be defi nite enough to “raise a right to relief above the speculative level,” and plaintiffs must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). The Dudenhoeffer decision effectively eliminates plaintiffs’ ability to rely upon publicly available information in framing a viable breach of fi duciary duty claim. According to the Court, “Where a stock is publicly traded, allegations that a fi duciary should have recognized from publicly available information alone that the market was



over-or-under valuing the stock are implausible as a general rule, at least in the absence of special circumstances.” Slip op. at 11. The door was left open to plaintiffs, however, “A plaintiff could nonetheless plausibly allege imprudence on the basis of publicly available information by pointing to a special circumstance effecting the reliability of the market price as ‘an unbiased assessment of the security’s value in light of all public information.’” Dudenhoeffer, slip op. at 10. But “special circumstances” may be hard to fi nd.

The Supreme Court observed that “special circumstances” cannot be found from public information. It explained that “allegations that a fi duciary should have recognized from publicly available information alone that the market was over-or-under valuing the stock are implausible as a general rule.”

To make ERISA plans safe from “special circumstance” claims, employers should consider removing insiders from any positions that administer, operate, or control a pension plan holding company stock. A second alternative would be to appoint an independent fi duciary, who is not an insider, to be solely responsible for determining whether to retain employer stock in the pension plan. A third variation to lessen “special circumstance” exposure would be to simply eliminate company stock as an employer matching or profi t sharing contribution in the pension plan.

One fi nal note: The public information defenses suggested by the Supreme Court have a limited range; they only apply to EIAP’s holding the stock of publicly traded companies. For the thousands of ESOP’s funded by stock of companies that are not publicly traded, those fi duciaries must continue to attend to the particulars of their own procedural prudence so as to avoid being the subject of future judicial guidance.

§ 19.3.6 Circuit Courts Update: In the Wake of Dudenhoeffer, the Ninth Circuit Doubles Down on Its Decision to Revive Stock Drop Class Action

After reconsidering its decision in Harris v. Amgen, Inc., 738 F.3d 1026 (9th Cir. 2013) in light of Dudenhoeffer, the Ninth Circuit has once again reversed the district court’s dismissal of plaintiffs’ ERISA class action. Harris v. Amgen, Inc., Case No. 10-5614 (9th Cir. Oct. 30, 2014).

Plaintiffs, a class of current and former employees of Amgen, Inc. and a subsidiary, were participants in employer-sponsored pension plans. Slip op. at 5. Specifi cally, they participated in employee stock-ownership plans that qualifi ed as “eligible individual account plans” (“EIAPs”) under ERISA. Id. Plaintiffs’ EIAPs included holdings in the Amgen Common Stock Fund, comprised entirely of Amgen common stock. Id.

Amgen is a biotechnology company that develops and markets pharmaceuticals. Id. at 7. After discovering how to make an artifi cial protein that stimulates the formation of red blood cells, Amgen commercialized the manufacture of a class of drugs used to treat red blood cell defi ciency (anemia).



Id. at 7-8. Plaintiffs’ claims arise out of a series of events relating to certain of these anemia drugs. Id. In the late 1990s and early 2000s, safety concerns were raised with respect to the use of these drugs. Id. at 9. Further trials also raised concerns. Id. at 9-12. But Amgen consistently stated that their drugs were safe and effective when used in accordance with their labels. Id. at 12. Amgen also engaged in marketing practices that encouraged both on- and off-label uses of these anemia drugs. Id. However, Amgen’s SEC fi lings stated that it marketed products for on-label uses only. Id. at 13-14. Amgen’s marketing practices were successful. Id. at 13. Sales of one drug leapt 14 percent comparing Q1 2007 to Q1 2006. Id. In 2007, safety concerns relating to Amgen’s anemia drugs became public. Id. at 14-15. The FDA mandated the strongest warning label possible be placed on the drugs. Id. at 15. As a result of the safety concerns, Amgen stock plummeted in value by 33 percent. Between September 19, 2005, when the stock was at its highest at $86.17 per share, and May 2007, when the stock hit $57.33 per share, Amgen stock’s price-per-share dropped $28.83. This lawsuit was fi led in August 2007. Plaintiffs fi rst amended consolidated complaint was fi led in March 2010.

Plaintiffs allege, among other things, that Amgen, its subsidiary, Amgen’s board of directors, and the Fiduciary Committees of the Plans (“Defendants”) acted imprudently by continuing to provide Amgen stock as an investment alternative when they knew or should have known that the price of the stock was artifi cially infl ated. Id. Plaintiffs also allege Defendants violated their duty of loyalty and care by failing to provide plaintiffs with material information about investment in the Amgen Common Stock Fund. Id. at 5, 29.

The district court dismissed Plaintiffs’ complaint against the plan fi duciaries. Id. at 5. The Ninth Circuit reversed fi nding that ERISA’s presumption of prudence, set forth in Quan v. Computer Sciences Corp., 623 F.3d 870 (9th Cir. 2010), did not apply. Id. at 6. Defendants petitioned the United States Supreme Court for writ of certiorari. Id. The Supreme Court put off ruling on Defendants’ petition until after it decided another case involving ERISA’s presumption of prudence, Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014). After deciding Dudenhoeffer, the Supreme Court granted cert, vacated and remanded Harris v. Amgen to the Ninth Circuit to reconsider in light of Dudenhoeffer. Id. On October 30, 2014, Judge William Fletcher wrote the Ninth Circuit opinion once again reversing the district court’s dismissal.

Count II alleges that Defendants continued to offer Amgen stock as an investment alternative while they knew or should have known about material omissions and misrepresentations and illegal off-label sales that had artifi cially infl ated the price of that stock. Id. at 21. The Ninth Circuit soundly rejected each of Defendants’ six arguments that their actions were prudent. The fi rst fi ve arguments were offered by Defendants before Dudenhoeffer was decided. The Ninth Circuit addressed them again. First, Defendants argued that because Amgen was not experiencing “severe fi nancial diffi culties” during the class period and because Amgen is a strong and profi table company today, investments in Amgen stock made during the class period were not imprudent. Id. at 22. The Ninth Circuit made quick work of this argument reasoning that



the reason Amgen had not experienced “severe fi nancial diffi culties” during the class period was because of the allegations that they were earning large, unsustainable profi ts based on improper sales of anemia drugs. Id. The Ninth Circuit also noted that the fact that Amgen might be on robust fi nancial ground now does not mean that stock prices were not previously artifi cially infl ated. Id. Second, Defendants argued that the decline in stock price is not suffi cient to show an imprudent investment. The Ninth Circuit opined that the proper question is whether the fi duciary used “‘appropriate methods’ to investigate the merits of the transaction” not whether the results of the investment were unfavorable. Id. citing Quan 623 F.3d at 879 (quoting Wright v. Oregon Metallurgical Corp., 360 F.3d 1090, 1097 (9th Cir. 2004)). Third, the Ninth Circuit rejected Defendants’ argument that the principle set forth in Kirschbaum v. Reliant Energy, Inc., 526 F.3d 243, 256 (5th Cir. 2008) applies here. Kirschbaum states:

[w]hen, like here, retirement plans are at issue, courts must be mindful of “the long-term horizon of retirement investing, as well as the favored status Congress has granted to employee stock investments in their own companies.” …[H]olding fi duciaries liable for continuing to offer the option to invest in declining stock would place them in an “untenable position of having to predict the future of the company stock’s performance. In such a case, [a fi duciary] could be sued for not selling if he adhered to the plan, but also sued for deviating from the plan if the stock rebounded.”

Id. The Ninth Circuit found that the Court’s concerns in Kirschbaum have “little bearing” on the Amgen case. Id. Unlike the fi duciaries in Kirschbaum who were compelled to make company stock an investment option for plan participants, here Defendants were not required to make Amgen stock an investment option, but did so anyway. Id. Fourth, Defendants argue that if Amgen stock had been removed as an investment option, the stock price would have fallen. The Ninth Circuit was not persuaded. Judge Fletcher opined:

It is true that removing the Amgen Common Stock Fund as an investment option would have sent a negative signal to investors if the fact of the removal had been made public, and that such a signal may have caused a drop in the share price. But several factors would have mitigated this effect. The effi cient market hypothesis ordinarily applied in stock fraud cases suggests that the ultimate decline in price would have been no more than the amount by which the price was artifi cially infl ated. Further, once the Fund was removed as an investment option, plan participants would have been protected from mak-ing additional purchases of the Fund while the price of Amgen shares remained artifi cially infl ated. Finally, the defendants’ fi duciary obligation to remove the Fund as an investment option was triggered as soon as they knew or should have known that Amgen’s share price was artifi cially infl ated. That is,



defendants began violating their fi duciary duties under ERISA by continuing to authorize purchases of Amgen shares at more or less the same time some of the defendants began violating the federal securities laws. If defendants had acted to remove the Fund as an investment option when Amgen’s share price began to be artifi cially infl ated—that is, when some of the defendants began to violate their obligations under the securities laws—that action may well have caused those defendants to comply with those obligations. But defendants did not do this. Instead, they continued to authorize the Fund as an investment option for a considerable period after they knew or should have known that the share price was artifi cially infl ated.

Id. at 26. Fifth, Defendants argued that they could not have removed Amgen stock as an investment option based on inside information. Id. at 27. But the Ninth Circuit found that “[c]ompliance with ERISA would not have required defendants to violate [securities] laws; indeed, compliance with ERISA would likely have resulted in compliance with securities laws.” Id. The Court reasoned: “If defendants had revealed material information in a timely fashion to the general public (including plan participants), thereby allowing informed plan participants to decide whether to invest in the Amgen Common Stock Fund, they would have simultaneously satisfi ed their duties under both the securities laws and ERISA.” Id. In the alternative, the Ninth Circuit opined, Defendants could have also made no disclosures and could have just not allowed additional investments in the Amgen Common Stock Fund while the price of stock was artifi cially infl ated. Id. Finally, the Ninth Circuit rejected Defendants new argument on remand. The Court held that Fifth Third does not create a new pleading requirement. Id. at 28.

Defendants’ attempt to dismiss Plaintiffs’ allegation of breach of duty and loyalty for failing to provide material information to plan participants also failed. The Ninth Circuit reiterated that “there is no contradiction between defendants’ duty under the federal securities laws and ERISA.” Id. at 29. The Court described the two laws as “complementary” and “reinforcing.” Id. The Ninth Circuit rejected Defendants’ argument that they do not owe a duty under ERISA to provide material information about Amgen stock to plan participants. The Court also rejected Defendant’s argument that plaintiffs must show actual reliance on alleged omissions and misrepresentations. Id. at 30-31. The Ninth Circuit ruled: “We see no reason why ERISA plan participants who invested in a company stock fund whose assets consisted solely of a publicly traded common stock should not be able to rely on the fraud-on-the-market theory in the same manner as any other investor in a publically traded stock.” Id. at 31. Finally, the Court ruled that statements made in SEC fi lings that were explicitly incorporated in the Plans’ Summary Plan Descriptions can be used to show that Defendants knew or should have known that the company’s stock price was infl ated and to show plaintiffs’ reliance on those statements under a fraud-on-the-market theory. Id. at 34.



On November 13, 2014, Defendants fi led a petition for rehearing en banc in the Ninth Circuit. If the Ninth Circuit’s decision stands, the practical effect of the Court’s ruling is that this case will proceed to the next phase of litigation. Fact-based inquiries need to be made into whether Defendants have violated their fi duciary duties. The doors to discovery, including expert witnesses, have been fl ung wide open. At least in this case, the defense bar’s fear that the effect of Dudenhoeffer will be to propel cases deeper into litigation has come to pass.

§ 19.4 Circuit Courts Update: ERISA Trumps State Mandated PTO Benefits

In Sherfel v. Newson, Case No. 12-4285, 2014 U.S. App. LEXIS 18628 (6th Cir. Sept. 30, 2014) the employer, Nationwide, which employs 32,000 employees in 49 states, maintained an ERISA-qualifi ed plan that provided three types of paid time off benefi ts: (1) short-term disability (“STD”), (2) long-term disability, and (3) “Your Time” benefi ts.

“Your Time” benefi ts are available for various personal reasons, including vacation and illness. To receive STD benefi ts, however, an employee had to qualify for short-term disability benefi ts under the terms of the plan. Disability was defi ned to mean “a substantial change in medical or physical condition due to a specifi c illness that prevents an Eligible Associate from working their current position.” Special Plan rules applied to maternity leaves. The plan stated that the fi rst fi ve days of paid maternity leave were to be paid out of an employee’s Your Time benefi ts. New mothers who were disabled for more than fi ve days were deemed STD disabled and entitled to STD benefi ts for six weeks following a vaginal delivery or eight weeks following a cesarean section.

Nationwide’s employees in Wisconsin participated in its ERISA-regulated PTO plan. Signifi cantly, the Wisconsin Family and Medical Leave Act (WFMLA) requires employers to provide six weeks of unpaid leave following “[t]he birth of an employee’s natural child[.]” The law contains a substitution provision requiring employers to allow an employee to substitute “paid or unpaid leave of any other type provided by the employer” for the unpaid leave provided by the statute. Wis. Stat. § 103.10(5)(b).

One Nationwide employee on maternity leave received six weeks of STD benefi ts in accordance with Nationwide’s plan. She then asked for more time off under the WFMLA. Even though her six weeks of paid STD benefi ts had been paid, she asked that this additional WFMLA leave be treated as STD eligible leave and that she be paid.

Nationwide’s plan administrator denied the employee’s request on the grounds that she was no longer disabled under the STD plan. The employee then fi led a complaint with the Wisconsin Workforce Department claiming the



WFMLA required Nationwide to pay the additional STD benefi ts she requested. The administrative law judge agreed and ordered Nationwide to pay.

Nationwide fi led an action in federal district court seeking a declaration that ERISA trumped the substitution provisions of the WFMLA. The district court ruled in favor of Nationwide, holding that, as applied against the company, the WFMLA was expressly and impliedly superseded by the terms of Nationwide’s ERISA-regulated plan. The Sixth Circuit affi rmed.

§ 19.4.1 ERISA Preemption LivesIn reaching its decision, the Sixth Circuit noted that state laws are superseded by ERISA if they: (1) mandate employee benefi t structures; (2) interfere with nationally uniform plan administration; or (3) create “alternative enforcement mechanisms” for the recovery of benefi ts provided under an ERISA plan.

According to the Sixth Circuit, the WFMLA’s substitution provision did all three. The circuit court further ruled that the WFMLA is impliedly preempted because it confl icts with ERISA insofar as it “imposes confl icting obligations upon the plan administrator—if the administrator complies with one obligation it violates the other—and thus the act is preempted to that extent.”

§ 19.4.2 Next StepsEmployers who operate nationwide have a choice: they can comply with varying state laws requiring paid family leave and paid sick leave or they can provide an ERISA-regulated, funded PTO plan to provide uniform benefi ts across the country.

Maintaining a funded ERISA-regulated leave plan provides several litigation-related advantages, including:

all disputes can be adjudicated in federal court;•

no jury trials;•

state law claims are not allowed;•

claimants will be required to exhaust the plan’s internal claims review • procedure before being permitted to sue;

a deferential (i.e., arbitrary and capricious) standard of review normally • is available to the administrator’s denial of a plan benefi t claim;

if an arbitration procedure is contained in the plan, its provisions will • be enforced and the arbitrator’s decision will be deferred to by the court; and

punitive or extracontractual damages are unavailable—a plaintiff’s • recovery will be limited to the benefi ts claimed and potentially an award of attorneys’ fees.

In addition, ERISA lightly regulates the conditions upon which PTO benefi ts are paid. Thus, for example, ERISA does not treat vacation benefi ts as



a property right as is done under California law. ERISA-governed PTO plans can thus contain use-it-or-lose-it provisions; California state law, on the other hand, forbids such provisions.

Of course, an employer’s decision on how to structure PTO is a busi-ness decision. As such it requires an evaluation of many factors, including monetary, administrative, and morale costs. Care must be taken in administering these options to ensure continued legal compliance. When structured properly, ERISA-governed plans can provide employers with the ability to offer uniform PTO plans nationwide while enjoying much greater design fl exibility.

§ 19.5 ERISA Litigation Trends: Be Careful What You Wish For, the Affordable Care Act Is Now Law

The decision by Congress to enforce the Affordable Care Act (ACA) through ERISA Section 715 means that starting on January 1, 2015, plan participants or benefi ciaries in “large employer” group health plans may bring claims to enforce their rights to any ACA benefi ts under ERISA. A participant who believes a health plan’s mandated benefi ts are not adequate can sue to enforce his or her rights to better benefi ts. ERISA § 502(a)(1)(B). Similarly, a plan fi duciary who misinterprets the plan and pays out plan money for improper claims or who otherwise mismanages the health plan can be sued for breach of fi duciary duty. ERISA § 502(a)(2) or 502(a)(3). The ERISA provision getting the most attention running up to January 1, 2015, ACA’s effective date, is ERISA Section 510. Employers who change an employee’s schedules to less than 30 hours per week to eliminate the employee’s eligibility for health plan benefi ts may fi nd themselves defending an ERISA section 510 discrimination claim.

§ 19.5.1 ACA BasicsInternal Revenue Code (IRC) Section 4980H applies to an employer that employs an average of 50 or more full-time employees during the preceding calendar year. On January 10, 2014, the Internal Revenue Service (IRS) released fi nal regulations delaying the effective date of the employer “play or pay” mandate until 2016 for employers with between 50 and 99 full-time employees. 79 Fed. Reg. 8544 (Feb. 12, 2014). The fi nal rule also indicates that as of January 1, 2015, employers who have 100 or more full-time employees must offer coverage to at least 70 percent of their full-time employees during 2015, instead of 95 percent. Id. Employers who sponsor health plans must offer coverage to all employees averaging 30 or more hours per week no later than 90 days from the date of hire. On the other hand, newly hired “variable” hour employees are not required to receive the offer of health plan coverage for up to 13 months from their start date. Beginning in 2016, employers with more than 50 full-time employees must



offer health plan coverage to at least 95 percent of their full-time employees, and their dependents, to avoid paying the penalty tax under Section 4980H(a). An employee’s hours of service include the following:

1. Each hour for which an employee is paid, or entitled to payment, for the performance of services to the employer; and

2. Each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.

An employer is to determine each employee’s full-time status by looking back at a defi ned measurement period of three to 12 months to determine full-time status for a subsequent “standard measurement period.” If an employee worked an average of 30 hours per week during the standard measurement period, the employer would treat the employee as full-time during the subsequent measurement period, the duration of which would be the greater of six consecutive calendar months or the length of the measurement.

A full-time employee under the ACA is anyone who works 30 hours or more per week, or 130 hours per month. Added to the total of full-time employees are the “full-time equivalents.” This amount is derived by dividing the total number of hours worked by all non-full-time employees during a given month by 120. The full-time equivalents calculation is to be used for purposes of calculating an employer’s size.

§ 19.5.2 ACA PenaltiesThe ACA penalty for not providing employees with “adequate” health plan coverage is simple. A large employer that does not offer health plan coverage containing the “minimal essential” requirements under the ACA may be assessed a $2,000 per-employee penalty if just one employee obtains coverage through a health coverage exchange or is given an ACA premium tax credit to purchase health plan coverage. The failure to provide adequate coverage penalty is multiplied by $2,000 against the entire full-time employee population.

A second ACA penalty targets employers that do not offer “affordable” coverage. In this scenario, if the employer permits an employee to enroll in a health plan but the cost of coverage is such that the employee remains eligible for a tax credit because the coverage is not “affordable,” then the employer is assessed $3,000 for each employee eligible for the tax credit. This “unaffordable” coverage penalty is linked to an individual employee’s house-hold income. Health plan coverage is deemed to be unaffordable if its cost exceeds 9.5 percent of a full-time employee’s household income (W-2 wages can be used) or it fails to provide minimum value to the employee (provides less than 60 percent actuarial value). IRC Section 36B(c)(2)(C) indicates that “60 percent actuarial value” means that the health plan will pay at least 60 percent of the expected cost for essential health plan benefi ts, leaving the individual



participant to pay 40 percent of costs for these benefi ts. Again, the penalty for offering unaffordable coverage is $3,000 multiplied by the actual number of full-time employees receiving federal subsidies to purchase coverage from a public health insurance exchange.

§ 19.5.3 The Peculiar Whistleblower PenaltyThe ACA also contains a whistleblower provision. It provides that no employer shall discharge or discriminate against “any employee with respect to his or her compensation, terms, conditions, or other privileges of employment” because the employee has received a credit or subsidy provided by the ACA. 29 U.S.C. § 218c(a)(1). U.S. Department of Labor guidance indicates that an employee’s hours or pay may not be reduced for having received a subsidy to purchase insurance through the use of a public insurance exchange. Because there have been no cases, we do not know how courts will view the ACA’s whistleblower protections. For example, the whistleblower provision may apply to reducing a full-time employee’s hours to part-time so that the employee would not have continuing health plan coverage. Employees who are reduced to part-time status and then purchase health coverage from a health insurance exchange and obtain a premium subsidy may have a whistleblower claim. The employee has the burden of proof. The employee receiving a premium tax credit would have to show that it was a contributing factor in the employer’s decision to reduce the employee’s hours of work. Whether limiting a part of the workforce to less than 30 hours per week constitutes discrimination under the ACA has never been decided by a court. In Hinshon v. King & Spaulding, 467 U.S. 69 (1984) the U.S. Supreme Court took an expansive view of the benefi ts protected by the employment relationship:

An employer may provide its employees with many benefi ts that it is under no obligation to furnish by any express or implied contract. Such a benefit, though not a contractual right of employment, may qualify as a “privileg[e]” of employment under Title VII. A benefi t that is part and parcel of the employment relationship may not be doled out in a discriminatory fashion, even if the employer would be free under the employment contract simply not to provide the benefi t at all.

Id. at 75.An employer that wishes to prevent whistleblower discrimination claims

should expressly state in some form of agreement with the employee that the employee’s hours of service will be limited to less than 30 hours per week and that the employee is an “at-will” employee.

It is doubtful that there will be many, or any, whistleblower claims under the ACA. The problem is that the employee’s burden of proof includes a showing that the fact an employee is receiving a premium tax credit contributed to the employer’s decision to reduce the employee’s hours of service. But how



would an employer ever know that a particular employee is actually receiving a premium tax credit?

Although it is true that during 2014 the IRS is to notify employers of employees potentially eligible to receive a premium tax credit, the notice will not tell the employer which employees actually take the premium tax credit. Accordingly, employers will never have actual knowledge of which employee received a premium tax credit. As a result, employees will be hard pressed to prove that the employer knew they had a premium tax credit in reaching the decision to reduce the employee’s hours of work.

§ 19.5.4 Business Reorganizations and the ACAHiring part-time employees is not a problem under the ACA. Problems arise when full-time workers’ hours are reduced to part-time status, making them ineligible for health plan coverage. For example, a management change that reduces workers from full-time to less than 30 hours per week and then results in overtime to the remaining employees could pose problems. Another obvious area of concern is subcontracting out or outsourcing aspects of the business. If an ACA large employer outsources all clerical functions to a non-ACA-covered small employer, is that a form of discrimination under ERISA Section 510? The U.S. Supreme Court has stated it might be.

In Inter-Modal Rail Employees Association v. Atchison, Topeka & Santa Fe Railway Co., 520 U.S. 510 (1997), the employer (Oldco) wanted to maintain a subsidiary’s (Oldco Sub’s) existing unionized workforce but jettison costly employee benefi t plans. Oldco decided to do this by putting Oldco Sub’s work out to competitive bidding. An unrelated third party (Newco) was the successful bidder. Newco hired Oldco Sub’s employees. However, Newco’s benefi t package was less generous than Oldco Sub’s. Newco employees then sued Oldco, Oldco Sub, and Newco for cheating them out of the better benefi ts they had under Oldco Sub’s employee benefi t plans.

§ 19.5.5 Supreme Court AnalysisThe federal law regulating an employer’s provision of employee benefi ts, ERISA, makes it unlawful to “discharge, fi ne, suspend, expel, discipline, or discriminate against a participant or benefi ciary [of an employee benefi t plan] … for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.” ERISA § 510, 29 U.S.C. § 1140. Put simply, an employer is not allowed to manipulate an employee’s terms and conditions of employment if the purpose is to cheat the employee out of promised employee benefi ts. The U.S. Court of Appeals for the Ninth Circuit had ruled that ERISA section 510 protected the retirement benefi ts of the former Oldco Sub employees but did not protect their rights to health, dental, vision, and other welfare benefi ts. Justice Sandra Day O’Connor, writing for a unanimous Supreme Court, disagreed, stating that Congress’s use of the word “plan” in Section 510 evidenced a congressional intent to protect an employee’s rights to both retirement and welfare benefi ts. 520 U.S. 514.



Justice O’Connor explained that although employers may properly amend, modify, or terminate welfare benefi t plans at any time, this does not mean an employer has unlimited powers:

An employer may, of course, retain the unfettered right to alter its promises, but to do so it must follow the formal procedures set forth in the plan.… The formal amendment process would be undermined if § 510 did not apply because employers could “informally” amend their plans one participant at a time. Thus, the power to amend or abolish a welfare benefi t plan does not include the power to “discharge, fi ne, suspend, expel, discipline, or discriminate against” the plan’s participants and benefi ciaries “for the purpose of interfering with [their] attainment of… right[s]”… under the plan.

520 U.S. at 515-16.The Supreme Court remanded to the Ninth Circuit the issue of whether

Section 510 protects participants from interference with “attaining” their welfare plan coverage:

Respondents argue that…an employee who is eligible to receive benefi ts under an ERISA welfare benefi t plan has already “attain[ed]” her “right[s]” under the plan, so that any subsequent actions taken by an employer cannot, by defi nition, “interfere[e]” with the “attainment” of…right[s]” under the plan. According to respondents, petitioners were eligible to receive welfare benefi ts [at Oldco Sub] at the time they were discharged, so they cannot state a claim under § 510.

520 U.S. at 516-17.

§ 19.5.6 ERISA Section 510 PrimerERISA section 510 prohibits employers from discriminating against employees for exercising their rights under ERISA or interfering with an employee’s rights to any type of employer benefi t. Under Section 510, it is unlawful for employers to “discharge, fi ne, suspend, expel, discipline, or discriminate against a participant or benefi ciary for exercising any right to which he is entitled under the provisions of an employee benefi t plan…or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this subchapter, or the Welfare and Pension Plans Disclosure Act.” See 29 U.S.C. § 1140. It also prohibits employers from “discharg[ing], fi n[ing], suspend[ing], expel[ing], or discriminat[ing] against any person because he has given information or has testifi ed or is about to testify in any inquiry or proceeding relating to this chapter or the Welfare and Pension Plans Disclosure Act.”

“Section 510 was designed primarily to prevent ‘unscrupulous employers from discharging or harassing their employees in order to keep them from obtain-ing vested pension rights.’” Dister v. Cont’l Grp., Inc., 859 F.2d 1108, 1111 (2d



Cir. 1988) (citing West v. Butler, 621 F.2d 240, 245 (6th Cir. 1980)). Section 510’s prohibitions seem pretty straightforward. That certainly was the goal. Congress enacted ERISA for the purpose of “provid[ing] a uniform regulatory regime over employee benefi t plans.” Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004). Certainty for employers is a reasonably expected byproduct of ERISA’s uniform regime. Or is it? One court has described Section 510 as “a mess of unpunctuated conjunctions and prepositions” and “anything but” unambiguous. George v. Junior Achievement of Centr. Ind., Inc., 694 F.3d 812, 814 (7th Cir. 2012). Whatever the reason, courts’ differing approaches to the Section 510 analysis have resulted in uncertainty and, at times, confusion.

§ 19.5.7 Courts Do Not Uniformly Apply the Same Analysis

One of the fi rst areas in which confusion arises is in knowing the plaintiff’s burden when showing that an employer violated Section 510. An essential element of Section 510 is that an employer must be at least in part motivated by the specifi c intent to engage in prohibited activity. Dister, 859 F.2d at 1111 (citing Gavalik v. Continental Can Co., 812 F.2d 834, 851 (3d Cir.), cert. denied, 484 U.S. 979 (1987); Titsch v. Reliance Group, Inc., 548 F. Supp. 983, 985 (S.D.N.Y. 1982), aff’d mem., 742 F.2d 1441 (2d Cir. 1983)). Most courts have adopted the McDonnell Douglas burden shifting framework in the Section 510 context. See, e.g., Dister, 859 F.2d at 1112 (“We hold that the McDonnell Douglas presumptions and shifting burdens of production are equally appropriate in the context of discriminatory discharge cases brought under § 510 of ERISA.”); Gavalik, 812 F.2d at 852 (3d Cir. 1987) (“As in the context of employment discrimination claims under Title VII, employees alleging discrimination under ERISA bear the burden of making out a prima facie case of discrimination.”). Under the framework set forth in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), fi rst the plaintiffs must establish a prima facie case of discrimina-tion. If they succeed, then the defendant is given the opportunity to articulate a legitimate, nondiscriminatory reason for the action. If they do so, the plaintiffs have an opportunity to show that the reasons are pretextual.

Courts, however, do not always utilize the same approach to plaintiffs’ prima facie case. Some have applied the Title VII standard. See, e.g., Dister, 859 F.2d at 1114-15. Others have required plaintiffs to do more and to show a causal link between the protected activity and the adverse action. For example, in the Sixth Circuit, the elements of an ERISA retaliation claim are as follows:

To establish a prima facie case of retaliation under § 510, an employee must show that (1) she was engaged in activity that ERISA protects; (2) she suffered an adverse employment action; and (3) a causal link exists between her protected activity and the employer’s adverse action. Dunn, 2006 WL 1195867, *3, 2006 U.S. Dist. LEXIS 26169, at *9 (ERISA retaliation) (citing Cooper v. City of North Olmstead, 795 F.2d 1265 (6th



Cir. 1986) (Title-VII retaliation)); Urbano-Spencer, 2006 WL 1851015, *3, 2006 U.S. Dist. LEXIS 45316, at *11. The fi rst two requirements are not at issue: Defendants do not contest that (1) Hamilton’s efforts, including her Benefi ts Suit, to seek disability benefi ts, were protected activities; and (2) her termination was an adverse employment action. The question is whether a causal link exists between the two.

Hamilton v. Starcom Mediavest Group, Inc., 522 F.3d 623, 628 (6th Cir. 2008).In Smith v. Ameritech, 129 F.3d 857, 865 (6th Cir. 1997), the U.S. Court of

Appeals for the Sixth Circuit explained that when the plaintiff’s employment was terminated while he was on short-term disability, and just one week before he would become eligible for long-term disability, his Section 510 claim failed because, at the time of his discharge, he no longer qualifi ed as “disabled” under either the short-term disability plan or the long-term disability plan. Id. at 865-66. In other words, plaintiff’s lack of eligibility for ERISA plan benefi ts caused his claim to fail. The Sixth Circuit explained:

The Eighth Circuit has held that part of a plaintiff’s primafcie burden under § 510 is to “demonstrate a causal connection between the likelihood of future benefits and an adverse employment action.” Kinkead v. Southwestern Bell Tel. Co., 49 F.3d 454, 457 (8th Cir. 1995). Although we did not classify it as part of the plaintiff’s prima facie case, we stated in Humphreys that a plaintiff must show “a causal link between pension benefi ts and the adverse employment decision. In order to survive defendants’ motion for summary judgment, plaintiff must come forward with evidence from which a reasonable jury could fi nd that the defendants’ desire to avoid pension liability was a determining factor in plaintiff’s discharge.” 966 F.2d at 1044 (quoting Nixon v. Celotex Corp., 693 F. Supp. 547 (W.D. Mich. 1988)).

Id. at 865.

§ 19.5.8 Courts Disagree about What Constitutes an Inquiry or Proceeding

Section 510’s prohibition against taking adverse action against an employee who has “given information or has testifi ed or is about to testify in any inquiry or proceeding relating to [ERISA]” is anything but straightforward. Indeed, the seven Circuit Courts of Appeal that have considered the issue are divided as to what types of activities are protected under this provision. On the one hand, the Fifth, Seventh, and Ninth Circuits have found informal, internal complaints to be protected activities. The Second, Third, Fourth, and Sixth Circuits, on the other hand, have adopted more limited defi nitions of what constitutes a protected activity.



The fi rst circuit court to consider this issue was the U.S. Court of Appeals for the Ninth Circuit in the case of Hashimoto v. Bank of Hawaii, 999 F.2d 408 (9th Cir. 1993) amended by 1993 U.S. App. LEXIS 28767 (9th Cir. Haw. Nov. 5, 1993). Jessica Hashimoto was an employee of the Bank of Hawaii. She alleged that she had been directed by bank employees to perform tasks that she believed amounted to a breach of ERISA’s fi duciary standards. For example, she claimed that a bank employee instructed her to “recalculate a former employee’s pension plan benefi t and to use fi nal pay, not fi nal average pay,” which is a violation of ERISA regulations. Id. at 410. Over the course of a year and a half, she complained several times to her employer that the bank was (or potentially was) acting in ways that violate ERISA. She was subsequently ter-minated and sued under Hawaii’s whistleblower statute. The Ninth Circuit found that her complaint was preempted by ERISA and should be characterized as a Section 510 violation. Judge Noonan opined that Section 510 was “clearly meant to protect whistle blowers” and:

It may be fairly construed to protect a person in Hashimoto’s position if, in fact, she was fi red because she was protesting a violation of law in connection with an ERISA plan. The normal fi rst step in giving information or testifying in any way that might tempt an employer to discharge one would be to present the problem fi rst to the responsible managers of the ERISA plan. If one is then discharged for raising the problem, the process of giving information or testifying is interrupted at its start: the anticipatory discharge discourages the whistle blower before the whistle is blown.

Id. at 411.One year later, in Anderson v. Elec. Data Sys. Corp., 11 F.3d 1311 (5th Cir.

1994), the U.S. Court of Appeals for the Fifth Circuit found that an employee who reported the illegal activities of another employee that constituted ERISA violations engaged in an activity protected by Section 510.

In 2003, the U.S. Court of Appeals for the Fourth Circuit rejected the reasoning in Hashimoto and Anderson. In King v. Marriott Int’l, Inc., 337 F.3d 421 (4th Cir. 2003), Karen King brought suit on the basis that she had been fi red for complaining about and refusing to violate ERISA. The Fourth Circuit held that her actions were not protected activities under Section 510. The Court opined that “the use of the phrase ‘testifi ed or is about to testify’ does suggest that the phrase ‘inquir[ies] or proceeding[s]’ referenced in Section 510 is limited to the legal or administrative, or at least to something more formal than written or oral complaints made to a supervisor.” Id. at 427. The court disagreed with the Ninth Circuit’s opinion that Section 510 can be “fairly construed” to protect intra-offi ce complainants. The King court opined: “[n]or do we think that we would be free to reject the most compelling interpretation of the statutory language for a ‘fair’ interpretation, even if we preferred as a matter of policy the result yielded by the broader interpretation.” Id. at 428.



Two years later, the U.S. Court of Appeals for the Second Circuit took a slightly less limited view of what level of formality is required for Section 510 protections to be triggered. In Nicolaou v. Horizon Media, Inc., 402 F.3d 325 (2d Cir. 2005), the Second Circuit found that an employee who alleged that she was terminated for raising 401(k) plan underfunding issues to the company CEO, controller, attorney, and president stated a Section 510 claim. The focus of the decision was a meeting between the employee and the company president. The court opined that the “[t]he informal gathering of information” falls within Section 510’s meaning of “inquiry.” Id. at 329. In other words, if a company seeks out information from an employee, the defi nition of “inquiry” is satisfi ed.

Continuing the trend, the U.S. Court of Appeals for the Third Circuit, in Edwards v. A.H. Cornell & Son, Inc., 610 F.3d 217 (3d Cir. 2010), held that the plaintiff did not state a claim under Section 510 when she made unsolicited internal complaints. The court found that “the complaints themselves, without more, do not constitute an inquiry.” Id. at 223.

In 2012, the tide changed. The U.S. Court of Appeals for the Seventh Circuit evened out the circuit split in George v. Junior Achievement of Cent. Ind., Inc., 694 F.3d 812 (7th Cir. 2012), amended by and rehearing denied at 2012 U.S. App. LEXIS 19972 (7th Cir. Ind. Sept. 24, 2012). In the summer of 2009, Victor George, an employee of Junior Achievement of Central Indiana, Inc. made an unsettling discovery. Money that he thought was being withheld from his paycheck for his retirement and health savings accounts was never deposited into those accounts. Over the next few months, he lodged complaints with the company, including with the president/CEO. When the issue was not resolved, he reached out to company board members. Finally, in October 2009, he was reimbursed for the missing deposits plus interest. Although he was set to retire in June 2010, in late 2009, Mr. George discussed taking early retirement with his employer. In January 2010, the president/CEO told him not to come to work. Believing that his employment contract had been altered and his deferred-compensation account was vested early, Mr. George drew down his account. He was subsequently terminated. He brought suit claiming that his employer violated Section 510. The Seventh Circuit considered the issue of whether Mr. George’s complaints were an “inquiry” protected by Section 510. The Seventh Circuit noted that Section 510 is ambiguous, and found that “[w]hen dealing with ambiguous anti-retaliation provisions, we are supposed to resolve the ambiguity in favor of protecting employees.” Id. at 814. Judge Easterbrook, for the court, opined:

We conclude that the best reading of § 510 is one that divides the world into the informal sphere of giving information in or in response to inquiries and the formal sphere of testifying in proceedings. This means that an employee’s grievance is within § 510’s scope whether or not the employer solicited informa-tion. It does not mean that § 510 covers trivial bellyaches—the statute requires the retaliation to be “because” of a protected activity. See Kasten, 131 S. Ct. at 1334-35. Someone must ask a question, and the adverse action must be caused by the



question or the response. What’s more, the grievance must be a plausible one, though not necessarily one on which the employee is correct. We have held that the anti-retaliation provision of Title VII does not protect employees who make insubstantial complaints. See, e.g., Mattson v. Caterpillar, Inc., 359 F.3d 885, 890-92 (7th Cir. 2004). That’s equally true for § 510.

Id. at 817.The Seventh Circuit found that the conversations between Mr. George and his

employer with respect to his questions about his benefi ts payments amounted to an “inquiry” because the employer responded to Mr. George’s requests. The court noted that if the employer had ignored the questions, they could not have caused the discharge. The appeals court remanded the case back to the district court.

On May 9, 2014, the Sixth Circuit weighed in. Sexton v. Panel Processing, Inc., 2014 U.S. App. LEXIS 8752 (6th Cir. May 9, 2014), considered the issue of whether a one-time unsolicited complaint to an employer about alleged violations of ERISA amounted to giving information in an inquiry. Brian Sexton worked as a general manager for Panel Processing, a company that makes fl oor panels. He was also a trustee for Panel Processing’s employee retirement plan. In 2011, Mr. Sexton and another trustee campaigned for two employees who were running for the board of directors. The employees won the election. However, the board refused to seat them claiming that to do so would violate the company’s bylaws’ limitation on the number of inside directors. The board also removed Mr. Sexton and the other trustee who had worked on the campaign from their positions as trustees. Mr. Sexton emailed the chairman of the board stating that he believed the board’s actions violated ERISA and other state and federal laws. He also wrote that he planned to bring the violations to the attention of state and federal agencies if they were not remedied. No one responded to the email. Sexton took no further action. Six months later, Sexton was fi red from Panel Processing. He sued under a state whistleblower act, and the company removed the case to federal court on the basis of ERISA preemption. The district court granted summary judgment on the ERISA section 510 claim. The Sixth Circuit affi rmed. It opined:

“Inquiry” might mean an offi cial investigation, as in “Earl Warren led an inquiry into the assassination of President Kennedy.” Or it might mean a question or a request for information, as in “The advocate answered the judge’s inquiry.” See Bryan A. Garner, A Dictionary of Modern Legal Usage 317 (2d ed. 1995). We need not decide whether § 1140 uses “inquiry” in the former sense, in the latter sense, or in both senses. Under either defi nition, no inquiry occurred. Sexton did not send the email in connection with an offi cial investigation. And he did not send the email in response to a question or request for information. Even what we might call a nunc pro tunc theory of “giv[ing] information…in any inquiry” would not aid Sexton. For even after he sent the email, no one asked him any



questions about the subject of the email, and no investigation involving him ever occurred. As the text of the email confi rms, this was nothing more than a complaint accompanied by a threat: Sexton demanded that the company change course and threatened action if it did not. The email neither asks nor answers a question. That is not “giv[ing] information…in any inquiry.”

Id. at 5.The circuit split, and internal disagreement about nuance, leaves

employers in a state of limbo. It is hard to make a risk assessment with respect to employment decisions when you do not know whether an employee’s actions are ERISA protected activities or not.

§ 19.5.9 Section 510 and the Statute of LimitationsEmployers also face uncertainty with respect to the statute of limitations that will apply to an alleged ERISA section 510 violation. As discussed previously, ERISA was supposed to provide a uniform set of laws to regulate employee benefi t plans. Aetna Health, Inc. v. Davila, 542 U.S. 200, 208 (2004). ERISA Section 510 violations are enforced under ERISA section 502(a)(3). Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 143 (1990). When a defendant asserts a statute of limitations defense in an ERISA lawsuit, the fi rst thing a district court will do is examine whether the claim asserts a right to plan benefi ts or a breach of fi duciary duty claim. The ERISA statute contains its own limitations period for fi duciary breach claims. This limitations period bars a breach of fi duciary duty claim after the earlier of six years from the date the act or omissions occurred or three years from the date the plaintiff acquires actual knowledge of the breach. 29 U.S.C. § 1113. The Circuit Courts of Appeals recognized two ERISA fi duciary breach claims to which the ERISA statute of limitations applies:

1. An action to recover money damages for a fi duciary breach; See Wright v. Heyne, 349 F.3d 321 (6th Cir. 2003) (receipt of commissions constitutes a prohibited transaction brought by the trustee) and

2. Other appropriate equitable relief to redress violations of ERISA or the terms of the plan. Radford v. General Dynamics Corp., 151 F.3d 396 (5th Cir. 1998) (negligent misrepresentations).

If the ERISA lawsuit does not involve one of these two claims—such as discriminatory discharge to deprive a participant of benefi ts—the circuit court deems itself free to fashion its own limitation period. The Circuit Courts of Appeals have settled on a rule of using the “most analogous state law” statute of limitations for ERISA discrimination claims. Use of state law limitations periods requires each circuit court to determine which state’s law is most analogous. Because states have a multiplicity of analogous state statutes of limitations, no set rule is in use. As a result, the “most analogous state law” statute of



limitations varies from case to case, even for the same types of claims within the same state. Similarly situated plaintiffs who are located in different states have different rights with respect to bringing a lawsuit depending on what the court thinks is their home state’s most analogous limitations period.

Retaliatory discharge claims can fi t under several different state statutes of limitations. As a result, some circuit courts have selected multiple standards, even for a single state, while other circuit courts disagree even for the same state. In the Fifth Circuit, a wrongful termination rule provides a two-year limitations period. McClure v. Zoecon, Inc., 936 F.2d 777 (5th Cir. 1991). In the Sixth Circuit, the wrongful terminations statute provides a four-year limitations period in Ohio. Taylor v. Goodyear Tire & Rubber Co., 38 F.3d 1216 (6th Cir. 1994). The Ninth Circuit applies a two-year limitations period in Arizona. Felton v. Unisource Corp., 940 F.2d 503 (9th Cir. 1991). As a result, each court in each case makes an individual determination as to the most analogous state law limitations period. Id.

The case-by-case selection method is evident in the Ninth Circuit. In one California case, it applied a three-year limitations period for statutory claims. D’Andrea v. Bank of America, 951 F.2d 359 (9th Cir. 1991). In another California case, a two-year limitations period for an oral contract was applied. Hinton v. Pacifi c Enter., 5 F.3d 391 (9th Cir. 1993). In a third California case, a one-year limitations period for a wrongful termination claim was “most analogous.” Burrey v. Pacifi c Gas & Electric, 159 F.3d 388, 396 (9th Cir. 1998).

One of the primary goals of the ERISA statute was to provide a uniform set of rules for employee benefi t plans. In fact, ERISA’s preemption provision is aimed at creating federal uniformity with respect to the administration of employee benefi t plans. See 29 U.S.C. § 1144(a). ERISA’s legislative history indicates that Congress intended for ERISA to preempt state law procedural rules and state law statute of limitations. H.R. Rep. No. 93-533 at 12 and 17 (1974); see also Sun Oil Co. v. Wortman, 486 U.S. 717 (1988) (stating that a state’s statute of limitations was a procedural device for purposes of the full faith and credit clause). Inasmuch as the ERISA statute states that ERISA Section 510 is enforced by the fi duciary provisions of ERISA section 502(a)(3), the limitations period found at ERISA section 413 should be applied.

§ 19.5.10 Conclusion: Look Before You LeapERISA section 510 is a trap for the unwary. Although reducing an employee’s hours to part-time to keep a business afl oat may seem like a good cost-cutting idea, it may also run afoul of the ACA as of January 1, 2015. That said, a key element of any Section 510 claim is a showing that the employer took action to reduce the employee’s hours with the specifi c intent to eliminate the employee’s health plan coverage. Given that up to 30 percent of all full-time employees can be excluded from health plan coverage, employers may want to consider defi ning eligibility for health plan coverage by job classifi cation instead of by “full-time” or “part-time” status. Using some forethought will allow strug-gling business owners to cut costs, reduce hours, or lay off employees without running afoul of ERISA.



§ 19.6 ERISA Litigation Trends: The Newest Wave, Out-of-Network Service Provider Lawsuits

Self-insured medical plans are the new favorite target of the ERISA plaintiffs’ bar. Medical plan service providers such as chiropractors, plastic surgeons, ambulatory surgery centers, and others fi le these lawsuits alleging that the self-funded, ERISA-regulated medical plans have systematically underpaid service providers for “out-of-network” claims.

This new wave started in 2000, when the American Medical Association (AMA) sued United Healthcare (UHC) and other for-profi t insurance carri-ers, alleging that use of the Ingenix software underpaid out-of-network claims. Other lawsuits followed. These lawsuits alleged that these large health insurance companies violated federal racketeering and state laws by systematically reducing, denying, and delaying payments owed to doctors for medical care rendered to subscribers. None of the health insurance companies have ever admitted any wrongdoing. Among the publicized settlement agreements were:

Aetna, $470 million•

35 Blue Cross/Blue Shield Plans and the Blue Cross/Blue Shield • Association, $128 million

Cigna, $440 million•

Wellpoint, $498 million•

The AMA’s lawsuit against UHC settled in 2009 for $350 million. In the AMA’s lawsuit, it alleged that UHC used artifi cially low fi gures to calculate the “usual, customary, and reasonable” (UCR) rate so as to force patients to take on a higher share of the costs. One allegation was that patients are typically charged $200 for a visit to an out-of-network physician. The insurance carrier using Ingenix reported that the typical UCR rate in the community was $75. The insurance company would then pay 80 percent of the $75. This would leave the insurance carrier’s payment as $60. The patient would be responsible for the remaining $140. The AMA and others charged that the UCR rate was calculated improperly, and that the UCR fee should, in fact, have been $150, so the carrier should have paid $120 and the patient $80.

During 2007 and 2008, Andrew Cuomo, then Attorney General (and now Governor) of the state of New York, began an investigation into allegations that health insurance companies were systematically underpaying out-of-network medical claims. His investigation determined that patients who received out-of-network medical services were paid between 10 and 28 percent less than they were owed. Both Attorney General Cuomo and the AMA charged that the



UCR numbers, derived from claims data created and maintained by Ingenix (a subsidiary of UHC) and sold to other insurance carriers, were fundamentally skewed in favor of the insurers. It was a “closed loop” according to Attorney General Cuomo, poisoned by inherent confl icts of interest: UHC and other insurers (notably Aetna) allegedly entered lower payments in the database and omitted higher ones, which lowered the result in the UCR rate by as much as 28 percent, according to Attorney General Cuomo’s investigation.

A number of plaintiffs’ lawyers have begun to follow the “out-of-network” yellow brick road. The current trend has been for several chiropractors or ambulatory surgery centers to sue a single insurance carrier as well as the hundreds of self-funded health plans that use the insurance carrier as the plan’s claims administrator. The gist of these lawsuits is an assertion by a group of medical doctors that the insurance company has improperly underpaid out-of-network medical claims. By suing both the insurance carrier as well as its self-funded medical plan clients, these new “out-of-network” cases typically involve hundreds of named ERISA plan defendants.

The backlash from the ERISA defense bar against these out-of-network complaints has been intense. After all, on what basis can a medical service provider bring a claim under ERISA to recover benefi ts from an ERISA-gov-erned medical plan? ERISA contains “six carefully integrated civil enforce-ment provisions.” Mass Mutual v. Russell, 473 U.S. 134, 146 (1985). ERISA Section 502(a)(1)(B), 29 U.S.C. § 1132(a)(1)(B), governing recovery of plan benefi ts, states that “[a] civil action may be brought by a participant or benefi -ciary… to recover benefi ts 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 benefi ts under the terms of the plan.”

The right to bring a lawsuit under ERISA section 502(a)(1)(B) is limited. Indeed, the U.S. Supreme Court has held that “both the remedies created by ERISA and the parties expressly authorized to seek them [a]re exclusive.” Pilkington PLC v. Perelman, 72 F.3d 1396, 1398 (9th Cir. 1995) (citing Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134 (1984) and Franchise Tax Bd. v. Constr. Laborers Vac. Trust, 463 U.S. 1 (1983)). In other words, unless a plaintiff is one of the categories of plaintiffs enumerated in ERISA Section 502, he or she lacks standing to sue. To circumvent this limitation, the medical service providers ask patients to sign an agreement assigning the patient’s claim for plan benefi ts to their doctor. Medical providers then take over the claim and appeal process on behalf of the patient. If the medical provider is dissatisfi ed with the outcome of the claim and appeal process, it then sues the medical plan. Medical providers allege they have standing to bring a claim for failure to pay benefi ts on the basis that they have taken an assignment of the claim. They argue that they “stand in the shoes” of the plan participant under ERISA. But as we discuss later, under most self-funded medical plans, a service provider’s “standing by assignment” theory does not hold water.



§ 19.6.1 Saga of No Assignment Clauses in ERISA Plans

ERISA-regulated pension plans are required to have anti-assignment provisions. See ERISA § 206(d)(1); 29 U.S.C. § 1056(d)(1) (“Each pension plan shall provide that benefi ts provided under the plan may not be assigned or alienated.”) However, ERISA has no parallel mandate for ERISA-governed medical plans. In Misic v. Building Service Employees Health, 789 F.2d 1374, 1376 (9th Cir. 1986), the U.S. Court of Appeals for the Ninth Circuit recognized that ERISA is silent about assignment in the welfare plans context. The court went on to hold that, as a general rule, ERISA does not preclude the assignment of the right to reimbursement for welfare plan benefits. In doing so, the Ninth Circuit opined:

Neither the specifi c purpose of the anti-assignment provision nor the general goal of the statute would be served by prohibit-ing the type of assignments involved in this case—assignment to the person who provided the benefi ciary with the health care of the benefi ciaries’ right to reimbursement for the cost of that care. Health and welfare benefi t trust funds are designed to fi nance health care. Assignment of trust monies to health care providers results in precisely the benefi t the trust is designed to provide and the statute is designed to protect. Such assign-ments also protect benefi ciaries by making it unnecessary for health care providers to evaluate the solvency of patients before commencing medical treatment, and by eliminating the necessity for benefi ciaries to pay potentially large medical bills and await compensation from the plan. Moreover, assignments permit a trust fund to obtain improved benefi ts for benefi ciaries by bargaining with health care providers for better coverage and lower rates.

Id. at 1377.Having established that assignments are valid, the next logical question

was: does a plan participant or benefi ciary have an absolute right to assign his or her benefi ts? Numerous circuit courts of appeals have found that the answer is no.

In Davidowitz v. Delta Dental Plan of California, 946 F.2d 1476 (9th Cir. 1991), a group of nonparticipating dentists attempted to obtain a preliminary injunction ordering Delta to honor benefi ciary assignments. Id. at 1477. Delta Dental’s benefi t plans expressly prohibited the assignment of claims by benefi ciaries, with language such as: “Payment for services provided by a dentist who is not a Participating Dentist shall be made to an Eligible Person, and shall not be assignable.” Id. at n.2. The Ninth Circuit had held in Misic that a health care provider with an allegedly valid assignment had standing to sue under ERISA. The district court granted the dentists’ request for an injunction. On



appeal, the Ninth Circuit concluded that an express non-assignment clause in an ERISA-regulated welfare plan is enforceable. The court explained:

While the benefi ciary’s right to assign when the plan is silent furthers ERISA policies, the absolute right to assign, notwith-standing a contract anti-assignment clause, does not necessarily further these policies. As discussed above, Delta cites ERISA policies that are benefi ted by its co-payment non-assignment structure, including promotion of consumer cost-sensitivity to hold down medical costs. This Court is unwilling to say that the underlying ERISA policies benefi ted by assignments outweigh the benefi ts promoted by Delta’s co-payment non-assignment structure. … Having carefully considered the subject and chosen to remain silent, this Court must conclude that Congress intended not to mandate assignability, but intended instead to allow the free marketplace to work out such competitive, cost effective, medical expense reducing structures as might evolve.

Id. at 1480–81.Three other courts of appeal have subsequently found that anti-assignment

provisions in medical plans are enforceable. See e.g., Physicians Multispeciality Grp. v. Health Care Plan of Horton Homes, Inc., 371 F.3d 1291, 1296 (11th Cir. 2004) (“[A]n unambiguous anti-assignment provision in an ERISA-governed welfare benefi t plan is valid and enforceable.”); City of Hope Nat’l Med. Ctr. v. HealthPlus, Inc., 156 F.3d 223, 229 (1st Cir. 1998) (“As we have previously stated, ‘straightforward language in an ERISA-regulated insurance policy should be given its natural meaning.’ [citations omitted] We agree with the district court that under the clear terms of the contract, Diaz could not assign her rights to City of Hope.”); St. Francis Reg’l Med. Ctr. v. Blue Cross & Blue Shield of Kan., Inc., 49 F.3d 1460, 1464 (10th Cir. 1995) (“We interpret ERISA as leaving the assignability of benefi ts to the free negotiations and agreement of the contracting parties.”).

§ 19.6.2 Attempts to Circumvent Plan-Based Anti-Assignment Provisions

The mere presence of an anti-assignment provision in a medical plan does not always deter service providers from suing as an assignee. One way they may attempt to get around these provisions is by asserting promissory estoppel. Often service providers submit claims directly to a patient’s self-insured plan. In response, many plans accept, process, and pay those claims. On this factual basis, plaintiffs may assert that the plan has thereby waived its right to invoke an anti-assignment provision.

Courts have recognized a narrow equitable estoppel exception to ERISA’s remedial scheme. See, e.g., Sprague v. General Motors Corp., 133 F.3d 388, 403 (6th Cir. 1998) (en banc). In the Ninth Circuit, elements of an equitable estoppel claim are hard to prove. A plaintiff must show a material misrepresentation,



reasonable and detrimental reliance upon it, extraordinary circumstances, ambiguity in the plan terms (such that reasonable persons could disagree as to their meaning or effect), and representations involving an oral interpretation of the plan. See Pisciotta v. Teledyne Indus., Inc., 91 F.3d 1326, 1331 (9th Cir. 1996).

In Riverview Health Inst. LLC v. Medical Mutual of Ohio, 601 F.3d 505, 523 (6th Cir. 2010), the U.S. Court of Appeals for the Sixth Circuit found that a medical plan claim assignee’s attempt to amend the complaint to add an equitable estoppel claim would be futile when the plan’s anti-assignment language was unambiguous. The relevant language stated:

[Medical Mutual] is authorized to make payments directly to Providers who have performed covered services for you. [Medical Mutual] also reserves the right to make payment directly to you. When this occurs, you must pay the provider and [Medical Mutual] is not legally obligated to pay any additional amounts. You cannot assign your right to receive payment to anyone else [nor] can you authorize someone else to receive your payments for you, including your Provider.

Id. at 520.In Renfro v. Funky Door LTD Plan, 686 F.3d 1044 (9th Cir. 2012), Jeff

Renfro sued Unum Life Insurance Company (“Unum”) seeking to recover disability plan benefi ts under two plans. Because Renfro had two employers, he was insured by Unum under both plans. In his lawsuit, Renfro claimed that Unum had improperly made a “double offset” when it deducted the amount of his Social Security Disability Insurance benefi ts from each plan. Renfro argued that equitable estoppel barred this “double offset.” The Ninth Circuit rejected this argument. The court found that the elements of estoppel could not be met when plan language is unambiguous. The Ninth Circuit recognized that an ERISA plan’s language, even when harsh, must be enforced: “[A] benefi ciary cannot obtain recovery on the basis of estoppel ‘in the face of contrary, written plan provisions.’” Id. at 1054, citing Davidian v. S. Cal. Meat Cutters Union and Food Employees Ben. Fund, 859 F.2d 134, 134 (9th Cir. 1988). Indeed, in U.S. Airways, Inc. v. McCutchen, 569 U.S. _____, 133 S. Ct. 1537, 1551 (2013), all nine justices of the U.S. Supreme Court agreed that “equity cannot override the plain terms of [an ERISA] contract.” In McCutchen, the Justices rejected a pair of equitable defenses involving a subrogation dispute arising under an ERISA-regulated medical plan:

“Every employee benefi t plan shall be established and main-tained pursuant to a written instrument,” § 1102(a)(1), and an administrator must act “in accordance with the documents and instruments governing the plan” insofar as they accord with the statute, § 1104(a)(1)(D). The plan, in short, is at the center of ERISA. And precluding McCutchen’s equitable defenses from overriding plain contract terms helps it to remain there.

Id. at 1548.



Another tactic plaintiffs use to get around an anti-assignment provision is by arguing that its scope is too narrow. In Torpey v. Blue Cross Blue Shield of Tex., 2014 U.S. Dist. LEXIS 11412, 2014 WL 346593 (D.N.J. Jan. 30, 2014), a plan participant, B.H., went to his orthopedic surgeon, Brian Torpey, for knee surgery. B.H. had health insurance sponsored by Oceaneering International, Inc., and insured by Blue Cross Blue Shield of Texas (“BCBSTX”). Dr. Torpey was not a participating provider with BCBSTX, and the surgery was considered an out-of-network service. Before the surgery, Dr. Torpey contacted BCBCTX to confi rm that B.H. had out-of-network benefi ts to cover the surgery. The cost of the surgery was $27,721. When the surgeon submitted a claim to BCBSTX for payment, however, BCBSTX only paid $1,732.98.

Before the surgery, B.H. signed a “Designation of Authorized Representative.” By signing, B.H. agreed that his surgeon “may receive all the benefi ts of [B.H.’s] policy.” Id. at 2014 U.S. Dist. LEXIS 11412, *3. He also signed an “Assignment of Benefi ts.” The Assignment of Benefi ts “expressly authorized [Dr. Torpey] to represent [B.H.] in appeals to [BCBSTX and the Plan Sponsor].” Id. After receiving BCBSTX’s $1,732.98 payment, Dr. Torpey appealed as B.H.’s authorized representative. The appeal was denied. He appealed a second time. The second appeal was also denied. Dr. Torpey then fi led suit against the plan sponsor and BCBSTX (defendants) as the authorized representative of B.H. In his complaint, Dr. Torpey sought plan benefi ts and statutory penalties.

The defendants moved to dismiss on the basis of lack of standing. The defendants argued that the plan’s anti-assignment clause provides that “[r]ights and benefi ts under the Plan shall not be assignable, either before or after services and supplies are provided.” Id. at 2014, U.S. Dist. LEXIS 11412, *2. Noting that the U.S. Court of Appeals for the Third Circuit has not ruled on the issue of whether an anti-assignment clause in an ERISA-regulated plan is enforceable, the district court looked to the U.S. Courts of Appeal for the First, Ninth, Tenth, and Eleventh Circuits for guidance. Those courts have all held that anti-assignment provisions in ERISA-governed plans are enforceable and assignment is without effect. The Torpey court followed suit and found that the anti-assignment clause was unambiguous and enforceable.

Dr. Torpey did not dispute that the anti-assignment clause was valid. Instead, he argued that “the anti-assignment clause only prohibits the assignment of ‘rights under a contract,’ and does not affect ‘that same party’s ability to assign causes of action arising from the breach of that contract.’” Id. at 2014 U.S. Dist. LEXIS 11412, *10. In other words, Dr. Torpey argued that he had standing because the anti-assignment clause did not prohibit B.H. from assigning to Dr. Torpey a cause of action to recover B.H.’s benefi ts under the plan. The district court rejected this argument. Judge Pisano explained:

While Plaintiff attempts to distinguish between the assignment of rights and benefi ts and the assignment of causes of action, the benefi ts provided under a healthcare plan include the right to bring an action to recover such benefi ts. See St. Francis, 49 F.3d at 1467 n.10. The anti-assignment clause voids any purported assignment of rights or benefi ts under the plan, and without



valid rights or benefi ts under the Plan, Plaintiff does not have standing to bring an action to recover such benefi ts.

Id. at 2014 U.S. Dist. LEXIS 11412, *11.The district court also noted that Dr. Torpey’s description of the Assignment

and Designated Authorized Representative forms did not reference a distinction between assignment of rights and assignment of a cause of action. The complaint was dismissed because Dr. Torpey had no standing.

§ 19.6.3 ConclusionBe prepared. Self-funded medical plan sponsors should consider adopting “no assignment” language to thwart claims for benefi ts by doctors, hospitals, and other service providers.

§ 19.7 ERISA Litigation Trends: New ERISA Class Action Lawsuits Challenge Church Plan Status

Six major ERISA class action lawsuits have recently been fi led in different juris-dictions across the country against some of the largest pension plans sponsored by religious organizations. The lawsuits were fi led in San Francisco against Dignity Health; in St. Louis against Ascension Health Alliance; in Englewood, Colorado, against Catholic Health Initiatives; in Newtown Square, Pennsylvania, against Catholic Healthcare East; and in New Brunswick, New Jersey, against Saint Peter’s Healthcare System. Each of these lawsuits was fi led by the same team of ERISA plaintiff’s side law fi rms. Keller Rohrback out of Seattle, and Cohen Milstein out of Washington, DC. On March 17, 2014, a group of plain-tiffs sued Advocate Healthcare Network Pension Plan in the Northern District of Illinois, Case No. 14-cv-01873. The case is titled Stapleton v. Advocate Healthcare Network. Advocate Healthcare is operated by the United Church of Christ and the Evangelical Lutheran Church in America. These six ERISA class action lawsuits put more than $2 billion in pension contributions and other damages in play. The fundamental claim in these lawsuits is that the IRS and Department of Labor interpretations permitting religious organizations to sponsor pension plans at hospitals are incorrect.

On December 12, 2013, Judge Thelton Henderson denied Dignity Health’s Motion to Dismiss. Rollins v. Dignity Health, USDC N.D. Cal., Case No. C13-1450. He ruled that Dignity Health’s pension plan is not a church plan. As such, the Dignity Health pension plan should be fully regulated by ERISA. Plaintiffs in the Dignity Health case can now proceed with a putative class action alleging violations of ERISA’s minimum funding requirements, including $1.2 billion in underfunding damages.



Church plans are not subject to the reporting, disclosure, participation, vesting, and funding requirements that are imposed on ERISA-regulated retire-ment plans. See 29 U.S.C. § 1002(33)(A). Judge Henderson acknowledged that for 30 years the Internal Revenue Service and Department of Labor have indicated that church-sponsored hospital plans, like Dignity Health’s pension plan, were entitled to the church-plan exemption. He ruled that the IRS private letter rulings were conclusory and not entitled to deference. Instead, Judge Henderson found that the words of the ERISA statute did not permit Dignity’s pension plan for hospital workers to qualify as a church plan. The words of the statute, according to the judge, require a church plan to be established by a church or convention, or association of churches. Dignity Health argued that it should receive church-plan status because its pension plan was maintained by a church-associated organization. Judge Henderson ruled that the ERISA statute only allows churches themselves to delegate the administration of their benefi t plans to church-sponsored pension boards. The statute does not permit non-church organizations to operate a church plan. Judge Henderson reasoned that his interpretation is supported by the legislative history, which refl ects concerns by church leaders that plans managed by their own pension boards should maintain their church-plan status.

On March 31, 2014, the district court in Kaplan v. Saint Peter’s Healthcare System, USDC D.N.J., Case No. 13-2941 MHS, denied Saint Peter’s Motion to Dismiss and found, as a matter of law, that the hospital’s pension plan is not a church plan. The Kaplan decision follows the rationale outlined by Judge Henderson in the Rollins v. Dignity Health case.

On May 13, 2014, the court in Overall v. Ascension, USDC E.D. Mich., Case No. 13-11396 AC, dismissed the plaintiff’s lawsuit. It found that the pension plan sponsored by Ascension Health was a church plan. On page 18 of his decision, Judge Cohn found that Judge Henderson’s analysis was fl awed:

In Dignity Health and Saint Peters, the district courts interpreted section (A) as a gatekeeper of section (C). That is, these courts concluded that section (A) sets the standard—only a church can establish a church plan—and section (C) only describes how a plan under section (A) can be maintained. The problem with this interpretation is that section (C) uses the word “includes” not “subject to.” Section (C) says that “A plan established and maintained . . . by a church includes a plan [meeting the requirements of section (C)(I] (sic). As Ascension puts it “under the rules of grammar and logic, A is not a ‘gatekeeper’ to C; rather if A is exempt and A includes C, then C is also exempt.” (Doc. 71 at p. 2). This is how the Court interprets section (C). In other words, a church plan may include a plan that meets the requirements of section (C). Section (C) requires that the plan maintained by an organization that is either (1) controlled by or (2) associated with a church or convention of churches. To fi nd otherwise would render section (C) meaningless.

The courts remain at sea over this diffi cult legal issue.


james p. baker emily l. garcia-yow ginny m. aldajani ... · erisa litigation in 2014 reﬂ ects...

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