By: Sam Schwartz-Fenwick and Jules Levenson

Seyfarth Synopsis: In a decision with wide ranging implications, the Ninth Circuit has ruled that a discretionary clause in an employer drafted plan document is subject to, and invalidated by, California’s insurance regulation banning discretionary clauses in insured plans.

In recent years a number of states have passed insurance regulations barring discretionary clauses in disability insurance policies in order to make it easier for participants to prevail on ERISA claims. A question that has dogged these regulations is the extent to which they are preempted by ERISA.  One particularly strong argument raised by employers is that even if a state insurance regulation can control an insurer-drafted plan document, basic principles of ERISA preemption preclude state law from invalidating any provision in an employer plan document.

The Ninth Circuit has now weighed in on this issue and in a victory for plaintiff, the Court of Appeals held that a state discretionary ban is not preempted by ERISA and properly extends to employer-drafted plans as long as the plan provides for insured benefits. Orzechowski v. Boeing Co. Non-Union Long Term Disab. Plan, No. 14-55919, ‑‑ F.3d –, 2017 WL 1947883 (9th Cir. May 11, 2017).

Orzechowski involved a denial of disability benefits. Defendant argued that the claim was subject to the highly deferential abuse of discretion review, as the employer drafted plan conferred discretion on the insurer (claim administrator) to decide claim.  The district court agreed. The district court further found that because the plan was in effect prior to the enactment of California’s discretionary clause ban, it was not covered by the ban.

The Court of Appeals reversed. The Court found the plan subject to the ban, because although the plan was in effect prior to the ban’s enactment, Plaintiff claimed benefits under an insurance policy that renewed (as defined by the statute) after the statute’s effective date.  Examining whether the plan was preempted by ERISA, the Court found that even though Boeing is not an insurance company, the law was directed to the insurance industry and, because the benefit at issuewas an insured benefit, all plan documents covering this benefit were subject to California state insurance regulations (including the discretionary ban).  Accordingly, the Court found the law valid as a regulation of insurance.  It thus remanded the claim for consideration under the de novo standard.

This case will likely have significant repercussions for plans in the context of benefits decisions, both in California and nationally. Absent reversal by an en banc panel of the Supreme Court, Not only will a significant number of decisions now be subject to de novo review in states in the Ninth Circuit, states considering banning discretionary clauses may be emboldened or spurred to action by this decision.  With fewer decisions afforded deference, a concomitant rise in litigation challenging benefits decisions is likely to follow.  Only time will reveal the exact extent of the impact.  Stay tuned.

 

By, Sam Schwartz-Fenwick and Jim Goodfellow

Seyfarth Synopsis: In an opinion that may result in increasingly complex ERISA benefits litigation, the Eighth Circuit has allowed a breach of fiduciary duty claim premised on alleged faulty claims handling practices to proceed in conjunction with a claim for benefits.

In a case that should catch the attention of ERISA plan administrators, the Eighth Circuit in Jones v. Aetna Life Insurance Company, et al held that a breach of fiduciary duty claim premised on improper claims handling could survive a motion to dismiss, even where the plaintiff also brought a claim for benefits seeking the same unpaid benefits.

In Jones, Plaintiff brought two claims against insurer Aetna: 1) a claim for benefits premised on Aetna’s termination of Plaintiff’s disability benefit; and 2) a breach of fiduciary duty claim premised on Aetna’s claims handling practices. The district court dismissed the breach of fiduciary duty claim as duplicative of the claim for benefits, citing the Supreme Court’s decision in Varity Corp. v Howe, 516 U.S. 489 (1996), which instructed that section 502(a)(3) breach of fiduciary duty claims function as a “safety net, offering appropriate equitable relief for injuries caused by violations that § 502 does not elsewhere adequately remedy.”  On summary judgment, the court held that Aetna did not abuse its discretion in denying the claim for benefits.

On appeal, the Eighth Circuit affirmed the denial of benefits. But, the Eighth Circuit reversed the dismissal of the breach of fiduciary duty claim. The court found it was consistent with Varity Corp to allow a fiduciary breach claim to proceed in tandem with a claim for benefits so long as both claims set forth a different theory of relief. The court found that Plaintiff had made this showing, as “[e]ven if an administrator made a decision with procedural irregularities that seriously breach its duties to its beneficiary, it is not necessarily liable under (a)(1)(B); instead, the serious breach prompts a more searching review of the denial of benefits claim.” The Eighth Circuit remanded the breach of fiduciary duty claim for further proceedings.

This decision stands in sharp contrast to the Sixth Circuit’s en banc decision in Rochow v. Life Insurance Company of North America, 780 F.3d 364 (6th Cir. 2015), and with Varity Corp. and its progeny. In Rochow, the Sixth Circuit held that because the plaintiff could be made whole by the remedies available under section 502(a)(1)(B) and section 502(g) through payment of benefits, interest, and attorney’s fees, the plaintiff could not recover under section 502(a)(3). Given how out of step Jones is with longstanding practice, it is likely that Aetna will seek en banc review, or even file a petition of certiorari with the Supreme Court. Nevertheless, while this case continues to work its way through the courts, it is likely that plaintiffs will rely on Jones in justifying pairing routine claims for benefits with claims for equitable relief.

An upsurge in such litigation, while in the short-run potentially advantageous to participants who will be able to obtain extra-contractual equitable remedies (such as sur-charge and disgorgement), risks in the long run causing insurers to greatly raise premiums to address high litigation costs. This in turn risks chilling the willingness of employers to offer ERISA disability benefits to their employees. Stay tuned for how this case plays out, either on further appeal or in future cases.

By: Jim Goodfellow and Ian Morrison

Seyfarth Synopsis: The Fifth Circuit has concluded that Texas’ ban on discretionary language in insurance policies does not alter the standard of review related factual determinations made by ERISA administrators. In so holding, the Court has suggested that Texas’ ban on discretionary language does not apply to non-insurance policy plan documents, which could create a circuit split on this issue.

In Ariana M. v. Humana Health Plan of Texas, Inc., No. 16-20174 (5th Cir. Apr. 21, 2017), the Firth Circuit concluded that Texas’ ban on discretionary clauses in certain insurance policies did not require a de novo review of the defendant administrator’s factual determinations in an ERISA claim for benefits.

In the Fifth Circuit, an ERISA administrator’s factual conclusions are reviewed for an abuse of discretion regardless of whether the plan contains Firestone discretionary language. See, e.g., Green v. Life Ins. Co. of N. Am., 754 F.3d 324, 329 (5th Cir. 2014) (noting that the standard of review for factual determinations is abuse of discretion regardless of the presence of a discretionary clause); Dutka ex rel. Estate of T.M. v. AIG Life Ins. Co., 573 F.3d 210, 212 (5th Cir. 2009) (“with or without a discretion[ary] clause, a district court rejects an administrator’s factual determinations in the course of a benefits review only upon the showing of an abuse of discretion.”).

Texas has enacted a ban on discretionary language in insurance policies: Texas Insurance Code Section 1701.062(a). In Ariana, the plaintiff argued that this ban precludes deference to and mandates a de novo review of the administrator’s factual findings. The Fifth Circuit rejected this argument, stating that “[t]he plain text of [Section 1701.062(a)] provides only that a discretionary clause cannot be written into an insurance policy; it does not mandate a standard of review.” Thus, “[Section 1701.062(a)], by its terms, does not mandate a standard of review.” Instead, it provides only that an insurer “may not use a document if the document contains a discretionary clause.” The Fifth Circuit interpreted Section 1701.062(a) to mandates what language can and cannot be put into an insurance contract in Texas, but stated that “[i]t does not mandate a specific standard of review for insurance claims.”

This decision preserves the abuse of discretion review of factual findings, but also suggests that the Fifth Circuit would find that Texas’ discretionary ban does not apply to non-insurance policy plan documents, and does not apply to insurance policies issued in states other than Texas.

By: Michael Stevens and Ronald Kramer

Seyfarth Synopsis:  The Sixth Circuit becomes the seventh circuit court to not require administrative exhaustion for statutory ERISA claims (as opposed to denial of benefit claims), while two circuit courts still do.

In a decision earlier this month, the Sixth Circuit joined six other circuit courts in holding that ERISA claims that seek vindication of statutory ERISA rights pertaining to the legality of a plan amendment, as opposed to an interpretation of the plan, are not subject to administrative exhaustion requirements.  The Sixth Circuit joined the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits in so holding, while the Seventh and Eleventh Circuits require administrative exhaustion even where plaintiffs assert statutory rights.

In Hitchcock v. Cumberland University 403(b) DC Plan, No. 16-5942, — F.3d —-, 2017 WL 971790 (6th Cir. Mar. 14, 2017), Plaintiffs, participants in the Defendant University’s defined contribution pension plan, challenged a retroactive amendment pertaining to matching contributions.  In 2009, the University added a five percent matching contribution, and amended the summary plan description to define the match.  However, in October 2014, the University amended the plan to replace the five percent match with a discretionary match, and retroactively made the match for the 2013-14 year zero percent.  In May 2014, the University had announced that the match for the 2014-15 year would also be zero percent.

In November 2015, Plaintiffs filed suit on a purported class basis bringing four counts:  wrongful denial of benefits under 29 U.S.C. § 1131(a)(1)(B), an anti-cutback violation under 29 U.S.C. § 1054(g), failure to provide notice under 29 U.S.C. § 1132(a)(3), and breach of fiduciary duty under 29 U.S.C. § 1104.

Defendants ultimately filed a motion to dismiss (which was converted to a motion for judgment on the pleadings), which in relevant part asserted that Plaintiffs had failed to administratively exhaust their anti-cutback and breach of fiduciary duty claims.  The district court granted the motion, finding that Plaintiffs had failed to exhaust their administrative remedies.  Plaintiffs appealed.

The Sixth Circuit reversed, holding that Plaintiffs’ claim challenged the “legality of the Plan amendment . . . [not] the calculation of their benefits.”  The district court improperly construed Plaintiffs’ claims, because the “resulting benefits are not the gravamen of Plaintiffs’ challenge. . . . It is a serious mischaracterization to simply say that because the denial of benefits claim and the statutory ERISA claims result in the same monetary sum, all must constitute denial of benefits claims.  Our precedent indicates that administrative exhaustion is a futile requirement for statutory ERISA claims that challenge the legality of a plan amendment.” (Emphasis added.)

The Court cautioned that “plan-based claims ‘artfully dressed in statutory clothing,’ such as where a plaintiff seeks to avoid the exhaustion requirement by recharacterizing a claim for benefits as a claim for breach of fiduciary duty” are still subject to administrative exhaustion.  The touchstone is what forms the basis for the right to relief:  “[T]he contractual terms of the pension plan or the provisions of ERISA and its regulations. . . The rights Plaintiffs assert—the right to receive accrued benefits which have not been decreased by an illegal amendment, and the right to have a fiduciary discharge his or her duties in accordance with the statute—are granted to them by ERISA, not by the Plan’s contractual terms.  Thus, Plaintiffs assert statutory claims, which are not subject to the exhaustion requirement.”

With the majority of circuits now firmly holding that exhaustion is not required for statutory claims, it is unclear whether Hitchcock is a likely vehicle for the Supreme Court to resolve the dispute.  In the meantime, plan defendants seeking to require administrative exhaustion must make their best efforts to characterize plaintiffs’ claims as challenges to plan terms or benefits determinations, rather than seeking vindication of statutory rights under ERISA.

By: Samuel Schwartz-Fenwick and Thomas Horan

Seyfarth Synopsis: Adding to the body of conflicting authority on the scope of the attorney-client privilege in ERISA lawsuits, a district court has found that the fiduciary exception to attorney-client privilege applies to an insurance company that acts as a claim administrator, thus requiring disclosure of  communications between the insurer and its lawyers regarding a claim for benefits during the claims process.

When an insurance company asks its attorneys for advice regarding decisions on benefits claims and appeals, it may be doing so without the protection of attorney-client privilege, according to a recent decision from the Southern District of New York. In McFarlane v. First UNUM Life Insurance Company, the court granted Plaintiff’s motion to compel production of  documents determined by the court to be within the fiduciary exception to the attorney-client privilege. No. 16-cv-07806, 2017 WL 480500 (S.D.N.Y. Feb. 6, 2017). In doing so, the court rejected the argument that the fiduciary exception to attorney-client privilege—which makes a fiduciary’s communications with counsel discoverable in certain situations— does not apply to insurers acting as benefit claims administrators.

Plaintiff sought benefits under an LTD plan offered by her employer. Authority to make decisions on benefit claims and appeals had been delegated to Defendant, the insurer who issued the policy. After benefits were terminated, Plaintiff filed suit and sought production of the administrative record. Along with its production, Defendant produced a privilege log containing three entries related to communications between the Lead Appeals Specialist and Defendant’s in-house attorneys. Those three entries were the subject of Plaintiff’s motion.

Defendant argued these documents were privileged based on the rationale of Wachtel v. Health Net, Inc., 482 F.3d 225 (3d Cir. 2007). In Wachtel, the Third Circuit found the fiduciary exception did not apply to insurers. It reasoned, that in contrast to an internal claims-administrator, when an insurer acts as the claim administrator the legal advice it seeks during the claim process is paid for by the insurer, not by the beneficiary or benefit plan. As such, the insurer—as opposed to a traditional administrator—owns the funds that will ultimately be paid out and has an interest in the management of those assets.

Rejecting the Third Circuit reasoning, the court found that the dispositive factor under Second Circuit law is the purpose of the communication in question. Thus, if the purpose of the communication concerns the exercise of fiduciary functions, the requirement that the fiduciary act in the beneficiary’s best interests makes the beneficiary the “true client” of the advice. This is a “fact-specific inquiry” and requires the court to examine both the content and context of the communication.

The court’s rejection of Wachtel highlights the fact that courts differ in their application of the fiduciary exception. It also, however, demonstrates that fiduciaries need to be aware of the risk that a court may find their communications with counsel discoverable should a dispute arise regarding an administrator’s decision during the administrative review process.

By Andrew Scroggins and Mark Casciari

The Seventh Circuit has stymied an EEOC attempt to declare that employer wellness plans violate the Americans with Disabilities Act (“ADA”). The court decided that the issues raised by the suit are moot, and deferred to another day tackling weightier questions of statutory interpretation and the EEOC’s rulemaking authority.

The decision arises out of EEOC v. Flambeau, Inc.  As we previously wrote, Flambeau offered an employer-subsidized self-funded health plan, but conditioned participation on completion of a “health risk assessment” and “biometric screening test.”  The health risk assessment “required each participant to complete a questionnaire about his or her medical history, diet, mental and social health and job satisfaction.” The biometric test “involved height and weight measurements, a blood pressure test and a blood draw.”  The EEOC argued that this violated the ADA’s ban on involuntary medical examinations, citing its then proposed (now final) regulations on employer-sponsored wellness plans.  (See also our prior blogs here and here.)

The district court rejected the EEOC’s position, finding that the EEOC’s regulations were not binding on the court.  Working through the statutory language, the court concluded that the ADA’s safe harbor protections, which exempt activities related to the administration of a bona fide employee benefit plan, enable employers to design benefit plans that require otherwise prohibited medical examinations as a condition of enrollment.

In EEOC v. Flambeau, Inc., No. 16-1402 (7th Cir. Jan. 25, 2017), the Seventh Circuit affirmed “but without reaching the merits of the parties’ statutory debate.”  The court held that neither party to the case continued to have a serious stake in its outcome, and the relief sought by the EEOC is either unavailable or moot.  Before the EEOC commenced litigation, Flambeau had already made its wellness program non-mandatory, having concluded that the costs of the health risk assessment and biometric screening test outweighed their benefits.  The employee who had challenged the policy had no claim for damages, including EEOC-requested punitive damages, and had long since left the employer.  The court also observed that the case was a poor candidate for evaluating the statutory questions because the events at issue had occurred before the EEOC issued its wellness plan regulations.

A decision on the merits of the EEOC’s regulations will have to wait for another day.  But the Seventh Circuit’s discussion did provide defense lawyers a memorable line to be cited in future cases where the EEOC stakes out a new or untested position:

An employer’s or its attorney’s disagreement with EEOC guidance does not by itself support a punitive damages award, at least where the guidance addresses an area of law as unsettled as this one.

Stay tuned for more court decisions and, perhaps, revocation or non-enforcement of the regulations, as the Trump administration makes leadership changes at the EEOC.  Note as well that, President Trump has named Vicki Lipnic as EEOC Acting Chair.

 

By Mark Casciari and Alexius O’Malley

Synopsis: Supreme Court has agreed to decide the fate of class waiver provisions in mandatory arbitration agreements, which may spark a new trend in ERISA benefits litigation. 

On January 13, 2017, the United States Supreme Court agreed to decide whether employment agreements mandating individual arbitration of employment disputes, and prohibiting class actions, are enforceable under the Federal Arbitration Act. The issue presented in the three cases consolidated for review, as stated in NLRB v. Murphy Oil USA, Inc., No. 16-307, is:

Whether arbitration agreements with individual employees that bar them from pursuing work-related claims on a collective or class basis in any forum are prohibited as an unfair labor practice under 29 U.S.C. § 158(a)(1), because they limit the employees’ right under the National Labor Relations Act [NLRA] to engage in “concerted activities” in pursuit of their “mutual aid or protection,” 29 U.S.C. § 157, and are therefore unenforceable under the savings clause of the Federal Arbitration Act, 9 U.S.C. § 2.

The consolidated cases do not involve ERISA-governed plans and employees covered by the NLRA, but the Court’s decision could have broader applications in the ERISA context.

It is no secret that plaintiff’s attorneys view plan participants as prime candidates, as well-defined groups of individuals, to bring ERISA class action lawsuits—where it can be said in many cases that the challenged fiduciary action presents common questions with common answers for similarly situated plan participants.

The stakes are high once an ERISA class is certified. Indeed, tens of millions of dollars are often at stake in class action settlements. See our sister Workplace Class Action blog, as to ERISA class action settlement amounts in recent years,  here.

And while defendants have solid arguments against class certification following recent Supreme Court decisions cutting back on certification, it may be appealing for plans to avoid class certification litigation altogether, and the associated high costs in attorney’s fees, by mandating individual arbitration of ERISA claims.

If the Supreme Court endorses arbitration in Murphy Oil, as it has in the recent past, see AT&T Mobility LLC v. Concepcion, 563 U.S. 321 (2011); American Express Co. v. Italian Colors Restaurant, 570 U.S. ––, 133 S. Ct. 2304 (2013), ERISA plan sponsors might reconsider mandating individual arbitration of ERISA claims.

Indeed, in Munro v. University of Southern California, No. 16-cv-06191 (C.D. Calif.), plaintiffs  seek ERISA class certification to challenge 401(k) plan fees, and the defendant countered by moving to compel individual arbitration, by relying on the mandatory arbitration agreements. The court has yet to rule on the motion.

Even if arbitration is the desired course, there are procedural issues to consider, including whether and how to share the cost of arbitration, how to select the arbitrator, how to define the scope of the authority of the arbitrator, and how to structure discovery.

On the substantive front, there also are several advantages and disadvantages to arbitration of ERISA claims to consider:

Advantages:

  • Avoids expensive class action litigation and potentially expensive class action settlements
  • Discourages plaintiff class action counsel from pursuing the claim
  • Facilitates early resolution of disputes
  • Enhances confidentiality

Disadvantages:

  • Nullifies appeal rights, absent fraud or an arbitrator’s exceeding his authority
  • Risks decision-making by an individual who less understanding of ERISA nuances than does a typical federal judge
  • Creates the possibility of numerous, simultaneous arbitrations, with fiduciaries facing arguably inconsistent decisions
  • Does not negate the possibility of litigation by the U.S. Department of Labor

Plan sponsors should pay close attention to the impending Supreme Court decision on class action waivers and mandatory employment arbitration.

By Ron Kramer

Seyfarth Synopsis:  The PBGC is seeking more information on hybrid  or two-pool withdrawal liability calculation methods.  This is a sign that the PBGC may be re-evaluating its role in approving hybrid proposals, although it may be too early to tell which way it will dive, especially under a Trump administration.

The Pension Benefit Guaranty Corporation (PBGC) issued a Request For Information (RFI) , to be published January 5, 2017, asking 24 questions about hybrid or two-pool alternative arrangements for multiemployer pension plans.  Under a hybrid plan arrangement, a plan creates two pools for withdrawal liability purposes: The old pool for the “old employers,” and a new pool for “new employers” (and those old employers who “withdraw” from the old pool and move to the new pool).  New employers are generally assessed withdrawal liability under a direct attribution method, and are not subject to the unfunded vested benefit liability of the old pool.  Old pool members who agree to withdraw, pay their old pool liability, and move to the new pool often receive special considerations such as discounted withdrawal liability, lower contribution increases, and waivers of some or all potential old pool mass withdrawal liability risk. Funds began seeking PBGC approval for hybrid plans as a way to generate revenue, entice new employers to participate, and provide old employers concerned about their withdrawal liability risk a way to pay their current liability and continue to participate at a reduced risk.

Since 2011 the PBGC has received approximately 20 requests for approval of hybrid withdrawal liability arrangements.  Notable plans that have had their requests approved include the Central States and New England Teamsters Pension Funds.  When the first plans submitted their requests, the PBGC had not been asked to — nor did it — take into consideration the benefits offered existing employers to move to the new pool.  Some plans offered considerable deals in terms of discounted assessments, frozen contribution rates, and mass withdrawal relief.  In its RFI, the PBGC admits that, had it known of the terms of the settlements offered employers to move to the new pools, that “could have affected PBGC’s analysis of whether the statutory criteria [for adopting an alternative assessment method] had been satisfied.”  The PBGC has since begun to analyze proposed withdrawal liability settlement terms to see how that impacts any potential risk of loss and the overall validity of a proposed hybrid arrangement.

The PBGC in its RFI is particularly interested in learning about the terms and conditions that apply to new and existing employers that enter into hybrid arrangements, including alternative benefit schedules, special withdrawal and mass withdrawal payment terms, alternative withdrawal liability arrangements, and the pros and cons of such hybrid arrangements for participants and the PBGC as the insurer of multiemployer plans.  Some of the more interesting queries include:

l  How the PBGC should factor in discounted withdrawal liability settlements and changes to plan mass withdrawal liability rules in its determination of whether to approve a hybrid plan arrangement, and whether the PBGC should approve proposed withdrawal liability payment terms and conditions.

l  Whether plans that have adopted a hybrid model have increased their contribution base (i.e., did they add employers or at least more participating employees as intended) or retain employers that otherwise would have withdrawn.

l  Whether there have been legal challenges to the hybrid model, and what role collective bargaining played in creating and implementing such models.

l  Whether plans are considering other alternative arrangements for withdrawal liability that would address the concerns addressed by the hybrid arrangement.

The PBGC also has asked what information and resources it can provide to interested parties about the innovative means plans are using in alternative withdrawal liability arrangements and what it can provide regarding the PBGC’s process for considering hybrid models.

What is unclear is where the responses to an Obama PBGC RFI may take the Trump PBGC.  Will it assume more oversight of such arrangements, or less?  Will it support alternatives or oppose them?  As for current pending proposals, the PBGC claims the RFI is independent of and without prejudice to its ongoing review of those requests.  Yet some of those requests have been pending for a very long time.

Interested parties have 45 days to submit their comments.

By Kathleen Cahill Slaught and Shireen Yvette Wetmore

Seyfarth Synopsis: Insurer gets to pick its remedy when hospital engages in dishonest billing and illegal kickbacks…to the tune of $41 million.

Judge Lynn Hughes of the U.S. District Court for the Southern District of Texas closed out the year with a bang in Aetna Life Insurance Company v. Humble Surgical Hospital, LLC, No. Civil Action H-12-1206 (S.D. Tex. Dec. 31, 2016). The not-so-appropriately-named Humble Surgical Hospital, LLC (“Humble”) was sued by insurer Aetna for allegedly waiving patient fees and paying kickbacks to referring physicians through an elaborate, but ultimately not-so-clever, shell game in which the providers created shell LLCs and paid $3,500 annually in “administrative fees” to participate in the 300-bed hospital’s scheme.

In a scathing opinion, the court explained the scheme as follows, “Because no economically rational patient would choose [Humble] over an in-network provider, Humble paid referral fees to doctors, waived patient costs, and submitted inflated bills to Aetna.”

In a three-year period from 2010 to 2013, Humble managed to bill $41 million in fees paid by Aetna. The Court found that Humble had enticed patients with promises that their out-of-pocket costs would be equal to or less than the cost of using in-network services. Yet Humble was not part of the Aetna network, nor did it charge Aetna for services at the in-network negotiated rates. Humble also enticed the doctors with a 30% kickback–representing nearly $12 million in fees.

Clearly illegal, right? Comically, Humble attempted to argue that Aetna was not entitled to recovery because it knowingly paid Humble the amounts it charged without challenging the charges. Because Aetna did not know of the scheme, the Court said that the voluntary payment rule did not apply.

Humble also attempted to argue defenses based on preemption. The Court found that ERISA is silent regarding overpayment by providers and that recovery actions for fraud are not attempts to enforce the applicable plans. As such, the Court found that Aetna’s claims were not preempted.

Humble even attempted to argue the defense of unclean hands. The Court made short work of that: “Humble has no defense . . . [it] is filthy up to the elbows from lies and corrupt bargains.”

In the end, the Court gave Aetna a choice between three remedies:

  • $12 million – to recover the kickbacks Humble unlawfully gave to providers
  • $20 million – to recover the difference between the out-of-network fees paid and the in-network equivalents, OR
  • $41 million – to recover the total amount paid by Aetna to Humble during the three year period from 2010 to 2013.

Which would you choose?

 

 

By Ron Kramer

Seyfarth Synopsis: Seventh Circuit  finds employer still obligated to contribute to benefit funds for the life of the CBA even though the employees decertified the union.

Employers often assume that when their employees decertify a union, that any obligations an employer had under the operative collective bargaining agreement would disappear. No union, no contract.  Right?

Wrong! In Midwest Operating Engineers Welfare Fund v. Cleveland Quarry, Case Nos. 15-2628, -3221, -3861, 16-1870 (7th Cir. Dec. 20, 2016), employees in three separate IUOE bargaining units of the Company voted to decertify in 2013.  At the time, the Union and the Company were party to five year collective bargaining agreements expiring in 2015.  The Company assumed the decertification of the Union, which allowed it to set its own terms and conditions of employment, ended any contractual obligation to contribute to the multiemployer welfare and pension funds (“Funds”).

The Funds sued, and after they were successful in district court the Company appealed. The Seventh Circuit recognized that the collective bargaining agreements were unenforceable as to the Union, but found nevertheless that the Funds had the right under ERISA to bring a suit for delinquent contributions under 29 U.S.C. § 1145.  The Court based its decision on the idea that when the Funds promised to provide a level of benefits to the employees (presumably by allowing the employer to participate in the Funds under the terms of the CBAs), that created a binding contractual promise.  The Court also recognized that the Funds were third-party beneficiaries to the CBAs and thus entitled to enforce them even if the Union could no longer do so.  “[S]o far as benefit law is concerned the employees were still working ‘under the terms of’ the collective bargaining agreement.”

The Seventh Circuit is not alone in finding that an employer’s contractual obligations to participate in multiemployer funds can survive decertification, withdrawals of recognition, and disclaimers of interest. But there is a competing view.  The Ninth Circuit has recognized that when a bargaining unit ceases to exist, be it by decertification or contract repudiation given the existence of a one person bargaining unit, any existing contract becomes void, not voidable, ending the employer’s obligation to contribute to employee benefit plans. Laborers Health & Welfare Trust Fund v. Westlake Development, 53 F.3d 979 (9th Cir. 1995) (contract repudiation); Sheet Metal Workers’ Int’l Ass’n v. West Coast Sheet Metal Co., 954 F.2d 1506 (9th Cir. 1992) (decertification case were the court held “that the renewal contract became void prospectively as of the decertification of the Union”).  Notably, the Seventh Circuit did not address the Circuit split.

Employers lucky enough to have employees decertify prior to contract expiration cannot assume their obligations to the funds necessarily end. Consult counsel before making any rash moves you may live to regret.