ERISA & Employee Benefits Litigation Blog

What Amgen and Tackett Tell Us About ERISA Litigation Trend Lines

Posted in Uncategorized

By: Mark Casciari

Two recent Supreme Court decisions, and a recent Sixth Circuit analysis on remand from the Supreme Court, offer a roadmap of sorts on ERISA litigation. In both decisions, the Supreme Court did away with presumptions, and at the same time made it more difficult for plaintiffs to sue.

In Amgen, Inc. v. Harris, 2016 WL 280886 (Jan. 25, 2016), the Supreme Court affirmed its 2014 decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S.Ct. 2459 (2014) that a claim for a breach of fiduciary duty of prudence against ERISA fiduciaries who manage publically-traded employee stock investments in 401(k) plans need not overcome a presumption of prudence. But the Court reversed a Ninth Circuit decision that imposed too low a burden on plaintiffs when arguing that the ERISA fiduciaries should have “done something” to halt a decline in stock values. The Court affirmed this critical Dudenhoeffer pleading standard for plaintiffs: The complaint must “plausibly allege” that “a prudent fiduciary in the same position could not have concluded that [ ] alternative action would do more harm than good.” (Emphasis added; internal quotation marks omitted.) There are two points to note with this affirmation of the Dudenhoeffer phrasing of the plaintiff’s burden: (1) “plausibility” has become at catch-word for specificity, and (2) alleging a negative with specificity is very hard to do.

In Tackett v. M&G Polymers USA, Inc., 2016 WL 240414 (6th Cir. Jan. 21, 2016), the Court of Appeals for the Sixth Circuit remanded a case to the District Court in light of the Supreme Court’s decision in M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015) that did away with a presumption of vesting of collectively bargained retiree welfare benefits. The Sixth Circuit instructed the District Court to evaluate the vesting issue under “ordinary principles of contract law.” The Sixth Circuit then listed many of these ordinary principles. Of note is the principle that “traditional rules of contractual interpretation require a clear manifestation of intent before conferring a benefit.” Combining this principle with plausibility means that plaintiffs must allege with specificity a plan sponsor intention to vest. A collective bargaining agreement’s durational language or incorporation of a plan document with a reservation of rights will make it hard for a plaintiff to allege with specificity the existence of vested benefits, even if the other governing language is vague.

So, what do these decisions suggest about the future of ERISA litigation? Expect a tougher road for plaintiffs to state claims upon which relief may be granted. Also expect stock drop and retiree welfare benefits litigation to shine a spotlight on an ERISA plan’s privately-held stock investments, the ERISA duty of loyalty (which was not the focus of the Amgen decision), and plans and collective bargaining agreements that, from a plan sponsor perspective, are badly drafted.

The Magic 8 Ball says –The Supreme Court’s Montanile Decision and The Seemingly Random Evolution of Supreme Court ERISA Remedies Jurisprudence

Posted in Uncategorized

It’s a common fact pattern.  A plan participant is injured and received benefits for treatment of his injuries.  The participant then sues a third party for damages based on his injuries.  The plan then seeks to recover a portion of the judgment or settlement in reimbursement.  So common is this fact pattern that the ability of the plan fiduciaries to recover on these facts has been the subject of four Supreme Court decisions.

In the latest decision, Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, No. 14-723 (January 20, 2016), the Court ruled 8-1 that no right of reimbursement exists if the participant already spent all the money received in the personal injury case.

Montanile involved the typical fact pattern, with a twist not present in the prior cases.  Here, the participant claimed to have spent some (if not all) of his personal injury settlement.  He challenged the claim brought by the health plan’s board of trustees under ERISA § 502(a)(3) for “appropriate equitable relief.”  Essentially, he argued that the trustees’ claim wasn’t equitable because he spent the settlement money and no longer held it in an identifiable fund.

To reach what dissenting Justice Ruth Bader Ginsberg characterized as a “bizarre conclusion” that the trustees had no claim, the Court consulted the Magic 8 Ball of ERISA remedies jurisprudence: “standard treatises on equity.”  Op. at 5.  According to these treatises and the Court’s prior decisions, to be an equitable remedy for which a plan fiduciary can sue, the remedy must be one that a court of equity would have typically awarded in the days of the divided bench.  The Court stressed that the claim and the remedy must be equitable in nature.  While the trustees’ claim for enforcement of an equitable lien by agreement was a typical equity claim, the remedy was not.  The Court reasoned that in a court of equity, “a plaintiff ordinarily could not enforce any type of equitable lien if the defendant once possessed a separate, identifiable fund to which the lien attached, but then dissipated it all.” Id. at 9.

All was not lost in this case, however, because the participant’s lawyer admitted at oral argument that a fact question existed as to whether the participant still had any of the settlement money in his possession.  The Court sent the case back to the lower courts to resolve this question and, if undissipated assets still existed, presumably to allow the trustees to recover them.

The practical consequences of the decision will be significant, because it will force plans to race to take action to recover funds faster than the participant can spend the money, which is not the norm now and may not be possible in practice.  The decision may also have consequences for other types of common reimbursement claims (such as for pension and disability benefit overpayments).  In the face of a Supreme Court decision that encourages participants to dissipate assets potentially subject to reimbursement obligations, plan sponsors may need to consider taking steps to avoid payment of benefits until potential overpayments are resolved, and fiduciaries should review and enhance their collection efforts.

Thoughts on Church Plan Status After Kaplan v. Saint Peter’s Healthcare System

Posted in Uncategorized

By Mark Casciari and Jennifer Neilsson

The Court of Appeals for the Third Circuit now is the first federal appellate court to decide whether a defined benefit plan sponsored by church-affiliated organization is a church plan under ERISA. The Court held that a hospital affiliated with a church could not establish a church plan exempt from ERISA. Kaplan v. Saint Peter’s Healthcare System, No. 15-1172, 2016 WL 9487719 (3d Cir. Dec. 29, 2015).

Under ERISA Section 3(33)(A), “church plan” means a plan “established and maintained. . . for its employees (or their beneficiaries) by a church or by a convention or association of churches which exempt from tax” (emphasis added). The Court reasoned that church plan status requires that the plan be established by a church, and the Saint Peter’s plan was not established by a church.

The Court found Saint Peter’s arguments regarding legislative history unpersuasive, and actually said that the legislative history more clearly indicated Congress’ intent to that church plan status be narrowly construed. The Court said that the fact that Saint Peter’s had received a private letter ruling from the Internal Revenue Service granting church plan status was not controlling.

Status of Church Plan Litigation. In the past three years, three other district courts have found that only churches can establish exempt church plans– Northern District of Illinois, District of Colorado, and Northern District of California. During a similar time period, three district courts have found that plans established and maintained by church agencies can qualify as exempt church plans– District of Maryland, District of Colorado, and Eastern District of Michigan. The Court of Appeals for the Seventh Circuit has heard arguments regarding the Northern District of Illinois case, but has not yet issued its opinion.

Importance of Cases. Many of the defined benefit plans at issue in the church plan litigation are severely underfunded. If the plans now must suddenly comply with ERISA, because they are not found to be church plans, the plan sponsors would face daunting funding requirements. Saint Peter’s plan was approximately $70 million underfunded at the time the lawsuit was filed, for example. Closing that gap under ERISA will not be easy. Plans newly subject to ERISA also would subject plan sponsors to PBGC scrutiny and impose PBGC insurance premium obligations. These financial strains may lead to corporate restructurings, layoffs, mergers or bankruptcies. The stakes are high, especially at a time when health care costs are rising, and of great concern. Imposing new ERISA costs on plans previously considered church plans will increase financial tensions.

The church plan litigation thus has consequences beyond the narrow issue of ERISA interpretation. Expect the litigation to continue in Courts of Appeals other than the Third Circuit, and expect as well the possibility of consideration by the Supreme Court if a circuit split develops. The Supreme Court might be tempted to resolve this issue not only because of the financial impact of finding church plan status, but also because of First Amendment religious freedom issues that are lurking in these cases.

Another Judge Puts the Breaks on EEOC Wellness Plan Overreach

Posted in Uncategorized

By: Mark Casciari

Our firm has acknowledged recently (see http://www.seyfarth.com/publications/MA041715-EB) that there are some questions about the authority of the EEOC to issue its proposed wellness regulations that claim legitimacy under the Americans with Disabilities Act (ADA). Just before the New Year, Judge Crabb of the U.S. District Court for the Western District of Wisconsin added her voice to those who think the EEOC is overreaching.

The new decision arises out of EEOC v. Flambeau, Inc., No. 14-cv-638 (W.D. Wisc. Dec. 30, 2015).

The EEOC, in particular the Chicago office of the EEOC, argued that Flambeau, Inc. violated the ADA section found at 42 U.S.C. § 12112(d)(4)(A) by conditioning participation in an employer-subsidized, self-funded health plan 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.”

Judge Barbara Crabb summarily rejected the EEOC’s reliance on Section 12112(d)(4)(A). That section prohibits disability-related medical examinations or inquiries that are not job related and consistent with business necessity. The judge reasoned that any EEOC reliance on 12112(d)(4)(A) is trumped by the ADA benefit plan safe harbor in § 12201(c)(2), as long as the wellness provisions are terms in an employer health plan, and are used to help the employer administer and underwrite insurance risks. The judge said that the safe harbor may not apply to protect wellness programs that are not part of a plan, assuming Section 12112(d)(4)(A) invalidates such programs.

Judge Crabb relied on statements of the Flambeau Inc.’s consultants that they used the aggregate wellness data to classify health risks, project plan costs and determine participant premiums. That the wellness terms were not set forth in a summary plan description or collective bargaining agreement was not consequential. Judge Crabb also said that the ADA’s “subterfuge” exception to the ADA benefit plan safe harbor was not triggered because the EEOC offered no evidence that the employer’s wellness terms were used to discriminate against any employee in a non-benefit plan aspect of employment.

EEOC v. Flambeau, Inc. is important because it is yet another rejection of how the EEOC reads the ADA benefit plan safe harbor. (The Court of Appeals for the 11th Circuit also has stated in Seff v. Broward County, 691 F.3d 1221 (2012) that the EEOC position on the ADA benefit plan safe harbor is agency overreach.) The Flambeau decision will help employers with a proactive wellness culture to defend against EEOC attacks.

Three final points are worth making:

  • EEOC v. Flambeau, Inc. could, of course, be appealed to the Court of Appeals for the 7th Circuit.
  • Employers still need to be mindful of nondiscrimination and wellness rules under the Health Insurance Portability and Accountability Act (HIPAA) and under the Genetic Information Nondiscrimination Act (GINA) that apply to employer health plans.
  • Whether wellness plans actually provide a return on investment remains subject to debate. A new study has shown a positive correlation between wellness programs and stock performance, (see http://www.mercer.com/newsroom/wellness-stock-performance.html), but the return on investment debate continues.

Equitable in Name Only?: Tracing a Long and Tortured Path

Posted in Plan Administration Litigation, Uncategorized

By: Jules Levenson, Meg Troy and Ian H. Morrison

            Knowingly spending money that isn’t yours sounds like a no-no, but depending on how the Supreme Court rules in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan (No. 14-723), certain ERISA plan participants may well have that perverse incentive, owing to obscure and arcane distinctions between legal and equitable relief.

On November 9, the Supreme Court held oral argument in Montanile, a case positioned to shake up accepted ERISA plan practices related to collection of third-party recoveries. The petitioner, (Robert Montanile) was injured in a car accident caused by a drunk driver and the respondent Plan (a multi-employer health and welfare plan) paid substantial amounts to cover related medical expenses. Montanile then sued the other driver involved in the accident and settled the case for $500,000.

Following the settlement (and a $200,000 payment to Montanile’s lawyer), the plan entered into negotiations to recover the $121,000 it had paid for Montanile’s medical expenses, based on its subrogation rights under the plan documents. In the ensuing ERISA action, filed after negotiations broke down, the district court found the settlement proceeds to be an identifiable fund and upon which it could impose an equitable lien in favor of the Plan Trustees. Bd. of Trustees of Nat. Elevator Indus. Health Ben. Plan v. Montanile, 593 F. App’x 903 (11th Cir. 2014)

But there was a catch. It turned out that Montanile had already deposited the money into his general bank accounts and spent it, so any recovery would have been out of his assets, not from the monies specifically obtained in the settlement. So what? Well, ERISA allows only equitable remedies in a case like this, and if the money was not an identifiable fund, there might not be an equitable way to get it.

This nicety of equity jurisprudence set the stage for an oral argument that traveled back in time to the days of the divided courts and the treatises of Justice Story. The key question confounding the Court was what relief was equitable – and when, in the development of equity, did that relief have to originate?

Montanile’s attorney, raising the specter of funds clawed back from innocent beneficiaries, argued for a strict tracing rule, under which the plan could only recover if it could trace settlement money to specific monies, using equity presumptions as to which funds were from the settlement and which were just general assets. This position would permit participants like Montanile to have a windfall from getting their benefits and keeping third-party recoveries for the underlying injuries. That position, also supported by the Solicitor General, seems an about-face from the (losing) position taken by the Solicitor General in Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), where the government argued for a broad construction of what relief was equitable. Conversely, the plan’s attorney argued for a broad theory of recovery, but was repeatedly pressed on his apparent insistence that the plan could recover the funds under equitable remedies that may have developed too late to be among the remedies “traditionally available in equity” that are available under ERISA.

Administrators and fiduciaries of ERISA health and welfare plans are waiting with baited breath for the decision, which could take several months. In the interim, ERISA plans should keep a close eye on payouts made to beneficiaries who might recover in a subsequent tort suit – and particularly to any settlements received. It may be possible to recover payments even under Petitioner’s tracing theory, but it will require vigilance and quick action. And so we wait to see: what gems are buried in the history of equity?

 

Don’t be Delinquent — Employer Loses Contribution Case by Default

Posted in Uncategorized

By Chris Busey and Mark Casciari

The Court of Appeals for the Seventh Circuit recently affirmed the importance of paying close attention to procedural rules.

In Central Illinois Carpenters Health & Welfare Trust Fund v. Con-Tech Carpentry, LLC, No. 15-1269, __ F.3d __ (7th Cir. Nov. 24, 2015), the plaintiffs, several multiemployer health and welfare benefit funds, sought roughly $70,000 in delinquent contributions from the defendant employer. The defendant failed to answer the complaint within 21 days. The plaintiffs then requested a default judgment, and the defendant again failed to respond. When the company failed to appear at the hearing on the default motion, the district court entered a default judgment. The funds then submitted proof of their damages and the court awarded nearly $100,000 in total damages. Defendant responded by filing a motion under Rules 60(b) and 55(c) of the Federal Rules of Civil Procedure. The district court denied the motion, and the company appealed.

Writing for a three judge panel, Judge Frank Easterbrook affirmed the lower court’s judgment. The company could not rely on Rule 55(c) because it did not seek to set aside the entry of default until after the court entered judgment. The company’s arguments also could not satisfy the Rule 60(b) standard of “excusable neglect.” It first argued that it believed answering was unnecessary because the parties were already discussing settlement. The court responded that a party can both answer a complaint and work towards settlement simultaneously. Defendant also contended that filing a substantive response would waive its right to arbitration. The court held, however, that nothing prevents a party from answering with a demand for arbitration. The defendant thus failed to show excusable neglect and instead decided “to march to the beat of its own drum.”

While this case offers nothing groundbreaking in terms of legal doctrine, it serves as a reminder of the options available to defendants seeking to avoid a default judgment. Once a judgment is entered, a defendant’s only recourse is to seek to avoid the judgment under the difficult Rule 60(b) standard. A right to arbitration does not excuse a default. As Judge Easterbrook said, the governing procedural rules require an answer to the complaint that demands arbitration.

 

Complicit in Sin: the Burden of the Opt-Out Form

Posted in Uncategorized

By: Sam Schwartz-Fenwick and Jules Levenson

Does filling out a form burden religious beliefs? We’re about to find out. On November 6, the Supreme Court agreed to review a group of seven cases (led by No. 14-1418, Zubik v. Burwell) brought by religious non-profit employers. The cases concern whether the contraception mandate in the Affordable Care Act (ACA) violates religious freedom under the Religious Freedom Restoration Act (RFRA).

These cases are a follow-up to Burwell v. Hobby Lobby. There, the Supreme Court held that RFRA allows closely-held for-profit corporations to avoid the ACA’s requirement that they provide insurance coverage for certain contraceptives. Subsequently, the Supreme Court vacated a Seventh Circuit ruling denying a preliminary injunction requested by the University of Notre Dame against the ACA’s contraceptive mandate. The Court ordered the appellate court to evaluate the appropriateness of the injunction in light of Hobby Lobby.

The issue in the Notre Dame matter, and the issue in the cases for which certiorari has now been granted, is whether the contraceptive mandate violates RFRA by requiring religious organization seeking to be excused from providing contraceptive coverage to notify the government in writing of their objection. Under the ACA, if a religious employer objects to providing contraceptive coverage it must submit an objection form to the government. The government then coordinates with the insurance carrier (or third-party administrator) to provide coverage without payment by (or involvement from) the objecting organization.

The religious organizations in these suits argue that requiring them to take an affirmative step (notifying the government of their objection) if they decline to provide contraceptive coverage on religious grounds, violates RFRA. The organizations contend that even though they themselves are not paying for the contraceptive coverage, their direct involvement in the process (by filling out the objection form) still makes them complicit in providing contraception (a practice barred by their sincerely held religious beliefs).

The government in contrast argues that the objection requirement does not violate RFRA, as it the least restrictive means of furthering the government’s substantial interest (the contraceptive mandate).

Until September, every Courts of Appeals to consider the question of whether the mandate improperly burdened the organizations’ beliefs ruled in favor of the government. On September 17, the Eight Circuit broke ranks and held (in a case not yet before the Supreme Court) that requiring the submission of an objection form substantially burdened religious freedom and was not the least restrictive way of furthering the government’s interest in making contraception available. Dordt Coll. v. Burwell, 801 F.3d 946, 950 (8th Cir. 2015).

Oral argument in Zubik has not yet been scheduled. The forthcoming decision will be  significant for employers and plan sponsors, as it will provide insight into what limits the Court is willing to place on a claim of religious freedom by entities (non-profit or otherwise) from generally applicable laws. Stay tuned.

Seventh Circuit Rejects In-Network Providers’ Bid For ERISA Claims Procedures

Posted in Plan Administration Litigation

By Ward Kallstrom and Andrew Scroggins

Claims by providers seeking to assert the rights of ERISA plan participants have been percolating in courts throughout the country.[1] The Seventh Circuit has now weighed in, rejecting the notion that providers who have payment disputes with ERISA plans are entitled to utilize a plan’s ERISA-mandated claims appeal procedures simply by virtue of being part of the plan’s network.[2]

The litigation began in 2009, when the Pennsylvania Chiropractic Association and several chiropractors filed suit against Blue Cross and Blue Shield Association and a number of Blue Cross and Blue Shield entities to challenge the insurers’ recoupment policies. The insurers had paid for health care services the providers had provided to patients, but subsequently unilaterally determined those payments were calculated on the wrong basis (e.g., fee for service rather than a capitated fee). The Insurers demanded repayment or withheld future payments in order to recoup the overpayments.

Although they had provider contracts with the insurers that specified the basis for calculation of their fees, the plaintiffs characterized the recoupments as retroactive denials of benefits due under the underlying ERISA plans of the insurers’ customers and argued that they were entitled to the same protections afforded to plan participants under ERISA Section 503’s claims procedure, 29 U.S.C. 1133, which requires that every employee benefit plan:

  1. provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and
  2. afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.

Following a trial in December 2013, Judge Kennelly of the Northern District of Illinois accepted the plaintiffs’ theory. The judge entered a permanent injunction against one of the insurers, Independence Blue Cross (“IBC”) requiring that its claims notices and appeal procedures meet the ERISA procedural requirements. This injunction would have required recoupment notices to include an explanation of IBC’s reasoning; identify plan provisions to support IBC’s position; describe information the provider could submit to avoid repayment; and provide notice of appeal rights. In the event of an appeal, the injunction would have required IBC to accept any comments or documents submitted by the provider and to disclose any records relevant to its final decision.

IBC appealed the decision to the Seventh Circuit, where a skeptical Judge Easterbrook dispatched the plaintiffs’ claims as exceeding ERISA’s requirements, reversing the district court decision.

First, the court observed that ERISA’s claims procedures are available only to “participants” and “beneficiaries.” The plaintiffs conceded they are not participants, and the court rejected plaintiffs’ arguments that they are beneficiaries. ERISA defines a “beneficiary” as a person designated “by a participant” or “by the terms of an employee benefit plan.” The providers did not have assignments of claims from their patients and could not point to any plan term that would make them beneficiaries. The court rejected the providers’ argument that they became beneficiaries simply by virtue of their contracts with IBC.

Second, the court rejected the providers’ strange argument that “every insurer (perhaps every policy)” should ipso facto be deemed to be a “plan,” thus making every provider-insurer agreement subject to ERISA rules. Here again, the court relied mainly on ERISA’s definitions. A “plan” is “any plan, fund, or program. . . established or maintained by an employer or by an employee organization, or by both, to the extent such plan, fund or program was established or is maintained for the purpose of” providing medical or other employee benefits. Independence, which was created decades before ERISA, is not established or maintained by an employer, and serves millions of people (more, the court noted, than any ERISA plan), does not fit the bill. The court pointed out that the providers had contracted with the insurers as insurers (the court characterized these as “wholesale-level” contracts), not with employers or plan sponsors (which the court described as “retail-level” contracts). Not “any document related to a plan is itself a plan” (court’s emphasis).

Finally, the court was unmoved by the providers’ concern that ERISA’s preemption clause might prevent them from bringing state law claims to enforce their contract claims. In the court’s view, “[w]e need not distort the word ‘beneficiary’ in order to enable medical providers to contract for and enforce procedural rules about how insurers pay for medical care.”

In reaching this result, the Seventh Circuit joined the Second Circuit[3] in holding that in-network status is not enough to entitle a provider to the ERISA rights afforded to participants. The dismissive tone of the Seventh Circuit’s decision, which relied on little more than the text of the statute, also suggests that the court did not view the decision as a close one. Perhaps the decisions by these two influential courts will begin to stem the tide of ERISA claims brought by providers.

[1] See links to prior blog posts on this topic:

http://www.erisa-employeebenefitslitigationblog.com/2015/07/01/chasing-payments-district-court-holds-that-providers-lack-standing-to-sue-erisa-plans-for-benefits-if-the-patients-remain-liable-to-the-provider-in-the-event-of-non-payment/

http://www.erisa-employeebenefitslitigationblog.com/2015/04/24/fifth-circuit-finds-out-of-network-medical-provider-has-standing-to-sue-health-plan/

http://www.erisa-employeebenefitslitigationblog.com/2013/11/12/out-of-network-provider-may-get-in-network-erisa-plan-reimbursement/

http://www.erisa-employeebenefitslitigationblog.com/2011/10/25/northern-district-of-california-ruling-of-first-impression-on-right-of-medical-plan-trustees-to-claw-back-overpayments-from-health-care-providers/

 

[2] Pennsylvania Chiropractic Ass’n v. Independence Hosp. Indem. Plan, Inc., No. 14-2322, — F.3d –, 2015 WL 5853690 (7th Cir. Oct. 1, 2015)

[3] Rojas v. CIGNA Health & Life Insurance Co., 793 F.3d 253 (2d Cir. 2015).

The Ninth Circuit Hammers Out A New Successorship Liability Test Under The MPPAA

Posted in Withdrawal Liability

By: Ron Kramer and Nick Clements

The Ninth Circuit, in Resilient Floor Covering Pension Trust Fund Board of Trustees v. Michael’s Floor Covering, Inc., Case No. 12-17675 (9th Cir. Sept. 11, 2015), joined the Seventh Circuit in finding that an asset purchaser, if a successor, can be liable for withdrawal liability triggered as a result of the sale. Moreover, the Ninth Circuit went a step further by setting forth how it would determine whether the buyer was a successor.

Studer’s Floor Stops, Michael’s Starts

It started innocuously enough.  In November 2009, Studer’s Floor Covering, Inc. (“Studer’s Floor”) announced it would be shutting down the business at the end of the year.  As Studer’s Floor wound down, one of the company’s longtime salesmen, Michael Haasl, incorporated his own company, calling it Michael’s Floor Covering, Inc. (“Michael’s”) and began bidding on his own projects.  Haasl negotiated with Studer’s Floor’s landlord so as to take out a lease on the Studer Floor’s storefront and warehouse the day after it ceased operations.  Haasl even obtained, with Studer Floor’s help, Studer Floor’s business phone number and hired five of Studer’s Floor’s former employees.  Haasl, however, did not technically buy Studer’s Floor.  The majority of Studer’s Floor’s equipment was sold off at auction and Haasl did not obtain or use Studer’s Floor’s business name or contact/customer lists — although Haasl knew many of its customers and suppliers given his years as a salesman.

Studer’s Floor and the Multiemployer Pension Plan Amendments Act

At the time of its closing, Studer’s Floor was a party to a CBA and made contributions to a multiemployer pension plan covered by the Multiemployer Pension Plan Amendments Act (MPPAA) amendments to ERISA.  Studer’s Floor stopped making contributions to the fund after it ceased operations.  Michael’s never made any contributions to the fund because it was not a party to the CBA.

Under the MPPAA, if an employer withdraws from a multiemployer pension plan, it is liable to the plan for withdrawal liability. There is an exception to this general rule, however, for construction companies that close and do not resume operations within the jurisdiction of the CBA for at least five years.  The reason for the exception is that if a company permanently closes, then there is presumably no harm to the fund because that company’s customers will patronize other companies that contribute to the fund, thus keeping contributions to the fund steady.  The dispute in this case — brought by the Resilient Floor Covering Pension Trust Fund — concerned whether (1) a successor employer can be subject to MPPAA withdrawal liability; and (2) if so, whether and how successorship liability might apply to employers for whom the construction industry exception might apply; and (3) whether Michael’s was a successor.

The Fund Sues Michael’s

A Federal District Court in the Western District of Washington held that Michael’s was not liable for withdrawal from the pension plan under the common-law doctrine of successorship liability. The common law test asks whether, under the totality of the circumstances, there was substantial continuity between the old enterprise and the new enterprise.

On appeal, the Ninth Circuit Court of Appeals reversed. The Ninth Circuit, in agreement with the Seventh Circuit (recent ruling reported here), held for the first time that a successor employer can be subject to MPPAA withdrawal liability. The Court rejected arguments that applying successorship principles was somehow contrary to the MPPAA given its provisions for: (i) a sale of assets exception to liability; (ii) the ability of a fund to ignore transactions with a principal purpose to evade or avoid liability; and (iii) the construction industry exception itself. As to the latter, the Court found that just as a fund is harmed when a construction industry employer which ceased operations resumes operations without participating in the fund, it is harmed when a successor operates without participating in the fund. Thus, the Court considered the successorship doctrine to be fully consistent with the construction industry exception.

The Court then examined how established successorship factors are to be weighed in the context of withdrawal liability involving a construction industry employer. For purposes of determining whether there was “substantial continuity” between the successor and predecessor employers, which the Court considered to be the primary and “most important” successorship consideration, the Court found that it should give special significance to whether the successor has “the same body of customers.” In particular, where objective factors indicate that the new employer made a conscious decision to take over the predecessor’s customer base, the equitable origins of the successor liability doctrine support the conclusions that the successor must pay withdrawal liability.

The Ninth Circuit found that the District Court did not properly identify or weigh the successorship factors as applicable to the MPPAA context. First, the District Court did not give prime consideration to whether the Michael’s had the same body of customers (so-called market share capture). In that regard the Circuit Court agreed with the fund’s position that the spotlight should be on the relative amount of revenue generation by Studer’s former customers, versus Michael’s suggested simple headcount comparison. Second, while the factor was not of special relevance in this situation, the District court erred in its method of analyzing workforce continuity. The District Court assessed whether Michael’s employed a majority of Studer’s Floor’s former workforce.  The question should have been whether “a majority of the new workforce once worked for the old employer” and that only those “employees as to whom pension fund contributions would be due, should be included in the workforce continuity test,” not based on a majority of all the new company’s employees.  Last but not least, the District Court errantly considered whether there was a continuity of ownership between the old and new companies, something that is not a consideration in a traditional successorship analysis.

Had the District Court asked these questions, the Ninth Circuit opined, it may have found the requisite successorship factors to also find successorship liability under the MPPAA.  As such, the case was remanded.

Upshot For Companies

Two circuits now agree that asset purchasers can be liable for withdrawal liability as successors. No circuit court has taken the opposite position. And the Ninth Circuit has set forth how it would focus on where a new company’s customer base is derived for purposes of determining successorship. In light of this, employers need to assume that if they are a successor they will be subject to the predecessor employer’s withdrawal liability.

The Future Of ERISA Litigation — Sleeper Supreme Court Case Worth Watching — Part II

Posted in Rule 23 Issues

By: Mark Casciari

On May 12, 2015, we reported at here on a non-ERISA case accepted for review by the Supreme Court in the 2015-16 Supreme Court Term that has ERISA Litigation implications.  Now, as that Term is set to begin on October 5, 2015, we report on a second non-ERISA case with ERISA Litigation implications that soon will be decided by the Court.

On June 8, 2015, the Supreme Court agreed to hear Tyson Foods Inc. v. Bouaphakeo, No. 14-1146, which presents these questions for review:

  1. Whether differences among individual class members may be ignored and a class action certified under Federal Rule of Civil Procedure 23(b)(3), or a collective action certified under the Fair Labor Standards Act (FLSA), where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample.2.   Whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the Fair Labor Standards Act, when the class contains hundreds of members who were not injured and have no legal right to any damages.

Oral argument will be heard in Bouaphakeo on November 10, 2015.  A number of amicus curiae briefs have been filed in the case addressing the likely impact of the Bouaphakeo decision well beyond its unique facts and the FLSA legal context.

The first question presented for decision might not have direct application to putative ERISA class actions as ERISA class counsel do not have a history of proving damages based on statistical samples.  But the second question presented for decision could have far-reaching application to putative ERISA class actions.  Many courts do not now require that a class definition exclude the possibility that a class member suffers no injury.  For example, the Court of Appeals for the Seventh Circuit will certify classes for liability purposes under Fed. R. Civ. P. 23(c)(4) without regard to any consideration of damages.  See e.g., McReynolds v. Merrill Lynch, 672 F. 3d 482 (7th Cir. 2012) (Title VII disparate impact context).  And, while ERISA class action filings are in decline, Courts still allow ERISA certifications that address damages in a hypothetical fashion.  See e.g., Spano v. Boeing Co., 633 F.3d 574 (7th Cir. 2011), where the Court allowed certification even though the reference point for the damage analysis could prove to have no bearing on actual damages.

A Tyson win therefore could mean that a putative ERISA class challenging a defective Summary Plan Description that applied to a class of plan participants will not be certified unless class counsel can trace the defect, in roadmap fashion, to a common injury for each class member.  It could mean that a putative ERISA class challenging allegedly excessive fees for a plan investment in a defined contribution plan will not be certified unless class counsel can show how each class member will receive a common increase in benefits should the claim succeed.  It could mean that a putative ERISA class challenging an investment decision for a defined benefit plan will not be certified unless class counsel can show that each class member likewise will receive a common increase in benefits should the claim succeed.  A Tyson win would build upon the Supreme Court’s focus in Comcast Corp. v. Behrend, 133 S.Ct. 2013 (2013), on frontloading the damage analysis in putative class actions, and would likely result in fewer ERISA class certifications or certifications of classes with fewer members.  Fewer or smaller certifications mean a better settlement bargaining position for ERISA class action defendants.  Defendants could further enhance their settlement positions by pursuing a quick resolution of the class certification question, in line with the Fed. R. Civ. P. 23 (c)(1)(B) mandate that the district court resolve the class question “[A]t an early practicable time after” the action is commenced.

We will keep you advised of further Supreme Court developments on the class action front in non-ERISA contexts, to the extent that they are likely to affect ERISA class action law.