By: Meg Troy and Ron Kramer

Seyfarth Synopsis: Disputes over lifetime retiree health benefits for union retirees may become a memory of the past. For the second time in three years, the Supreme Court confirms that collective bargaining agreements must interpreted based on ordinary principles of contract law and it is inappropriate to presume that an agreement allows lifetime vesting of retiree benefits.

On February 20, 2018, in CNH Industrial N.V. v. Reese, No. 17-515 (per curium), the Supreme Court rejected the Sixth Circuit’s attempt to revive the Yard-Man inference. In 2015, the Court in M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015), struck down the Sixth Circuit’s use of the Yard-Man inference, which courts used to infer that negotiated retiree benefits were intended to continue for the retirees’ lives. The Court found that when a contract is silent as to the duration of retiree benefits, “a court may not infer that the parties intended for those benefits to vest for life.” Rather, collective bargaining agreements must be interpreted based on ordinary principles of contract law. You can read about the Court’s decision in M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015), here.

In Reese, the Sixth Circuit basically decided that, if it could not use the Yard-Man inference to infer vested benefits, it could still use the inference to find collective bargaining agreements ambiguous regarding the vesting of retiree health such as to permit the introduction of extrinsic evidence of vesting. While the Sixth Circuit acknowledged it was basically applying Yard-Man to find an ambiguity, it reasoned that “[t]here is surely a difference between finding ambiguity from silence and finding vesting from silence.”

The Supreme Court once again said “no.” It rejected the Sixth Circuit’s way of handling these disputes, which the justices said was rooted in inferences and assumptions and not the text of the applicable collective bargaining agreements. The agreement at issue contained a general durational clause that applied to all benefits unless otherwise specified. As such, the Court held that the general durational clause meant the agreement unambiguously provided that CNH retirees were entitled to company-provided health benefits only until the agreement expired and not indefinitely. The Sixth Circuit’s decision to the contrary inappropriately used inferences inconsistent with Tackett. The Court reverse the Sixth Circuit’s judgment and remanded the case for further proceedings consistent with this opinion.

Thus, for the second time in three years, the Supreme Court has rejected Yard-Man and has definitively held that collective bargaining agreements are to be interpreted according to ordinary principles of contract law. Yard-Man is dead. The interference cannot even be used to find an ambiguity in a contract. Hopefully, this time the Sixth Circuit will listen.

By: Ryan Pinkston and Jon Braunstein

Seyfarth Synopsis: In a major victory for ERISA plans and other payors, the Fifth Circuit recently overturned a district court’s notorious decision in favor of a healthcare provider and reinstated a plan administrator’s ability to guard against healthcare billing fraud, waste, and abuse.

On December 19, 2017, the United States Court of Appeals for the Fifth Circuit issued its decision in Connecticut General Life Insurance Co. v. Humble Surgical Hospital, LLC, 878 F.3d 478 (5th Cir 2017), reversing a highly publicized trial court decision that threatened the ability of ERISA plans, insurers, and other payors to safeguard their coffers from providers engaged in healthcare fraud, waste, and abuse.

As described by the Court of Appeals, between 2010 and the initiation of litigation in 2016, Humble Surgical Hospital (“Humble”), a physician-owned hospital in Harris County, Texas, performed hundreds of non-emergency services on members of ERISA and welfare benefit plans administered by Connecticut General Life Insurance Company and its parent corporation (together, “Cigna”). After processing an expensive claim from Humble for what appeared to be a noncomplex outpatient surgical procedure, Cigna increased its scrutiny of Humble’s claims and surveyed plan members whom Humble had treated. Based on its analysis, Cigna concluded that Humble was engaged in “fee-forgiving” (i.e., waiving patients’ co-insurance or deductible fees) and also intentionally inflating its charges to increase reimbursements.

Cigna then sued Humble to recover over $5 million in alleged overpayments. In response, Humble asserted counterclaims against Cigna for nonpayment or underpayment of claims, breach of fiduciary duty, and failure to comply with requests for plan documents. After a bench trial, the district court concluded that Cigna’s claims and defenses failed as a matter of law. The district court also awarded Humble nearly $11.4 million in damages based on Cigna’s underpayment of claims, nearly $2.3 million in statutory penalties based on Cigna’s failure to provide plan documents upon request, and over $2.7 million in attorneys’ fees based on Humble’s success in the litigation. Cigna appealed.

On review, first, the Fifth Circuit reversed the award to Humble of nearly $11.4 million in damages based on underpaid claims and Cigna’s purported breach of fiduciary duties. Notably, the Fifth Circuit held both that the plans at issue vested Cigna with discretionary authority to determine eligibility for benefits and also that Cigna’s interpretation of plan provisions to prohibit “fee‑forgiving” was not arbitrary or capricious. The Court of Appeals also determined that Cigna’s decision was supported by substantial evidence, namely, the survey responses from plan members indicating that Humble had informed the members that they would not be charged for any of the services at issue. This conclusion affirms that courts should defer to a plan administrator’s interpretation of the terms of its own plan.

Second, the Fifth Circuit reversed the approximately $2.3 million awarded to Humble as statutory penalties, because Cigna was not an “administrator” as defined by ERISA. The Fifth Circuit also joined at least eight other circuits in rejecting the notion that a person or entity may become a de facto administrator for notice or statutory penalty purposes. The Court of Appeals’ decision supports the proposition that courts should adhere closely to the express language of the relevant ERISA provision when resolving a dispute, and it also provides welcome comfort to third party claims administrators and other “non-designated” persons or entities that they cannot be held liable for ERISA statutory penalties.

Third, the Fifth Circuit reinstated Cigna’s fraud claims on the ground that the district court failed to address Cigna’s argument that Humble affirmatively misrepresented actual charges by overbilling Cigna. The court’s decision is a reminder that a trial court should examine carefully all of the ways in which a fraudulent scheme may be perpetrated before dismissing a plan’s fraud claims. Finally, based on the foregoing outcomes, the Fifth Circuit vacated the award of attorneys’ fees to Humble and remanded the issue for reconsideration in light of the appellate decision. It remains to be seen whether the trial court will award Cigna its attorneys’ fees in light of its significant success before the appellate court.

Healthcare litigation is on the rise, especially reimbursement disputes. In this instance, Cigna filed suit against Humble in hopes of protecting itself — and health plans for which it serves as claims administrator — from healthcare fraud and abuse. In exchange, Cigna faced a judgment against it in excess of $16 million. The Fifth Circuit’s decision vindicating Cigna’s position constitutes a significant victory for ERISA plans, insurers, and other payors, both for its affirmation of ERISA principles and also for its reversal of a trial court decision that had gained some notoriety for its slant in favor of healthcare providers.


By Ronald Kramer and Michael W. Stevens

Seyfarth Synopsis: Claims for benefits at termination may proceed as a breach of contract claim in state court, and avoid ERISA preemption, where the calculations are individualized, straightforward and do not implicate an ongoing administrative scheme.

Under a recent decision from the Central District of California, employers may not be able to invoke ERISA preemption and remove cases to federal courts where the benefits claims at issue are not “complex” and do not implicate administrative discretion.

In Amlani v. Baker’s Burgers, Inc., No. 17-02278, 2018 WL 354617 (C.D. Cal.), Plaintiff brought a breach of contract claim after his employment agreement was terminated by the Defendant. Plaintiff had worked with Defendant for almost 29 years, the first 18 of which were covered by a “handshake” agreement based on a percentage of sales. Id. at *1. In 2006, the parties entered into a written Employee Benefits Agreement, which specified certain benefits to be paid to the Plaintiff. In 2008, they subsequently entered a new Employment Agreement, which in relevant part, allegedly entitled Plaintiff to a longevity payment of “1.68 times [his] base salary and fringe benefits” after the vesting period. Id. at 2.

Defendant terminated Plaintiff, and Plaintiff brought a breach of contract suit in state court claiming he was entitled to certain severance benefits, as well as the longevity payment. Id. Defendant removed to federal court, asserting that Plaintiff’s claims were preempted by ERISA § 502(a)(1)(B). Id.

The Court proceeded to examine whether Plaintiff’s claims fell within the preemption analysis established by Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), which permits preemption where a claim could have been brought under §  502(a)(1)(B), and implicates no other legal duty.

The Court focused on the first half the inquiry: whether Plaintiff’s claims could have been brought under ERISA. To do so, the Court examined whether the agreement constituted a benefit plan covered by ERISA: “does the benefit package implicate an ongoing administrative scheme?” Id. at *3 (citing Delaye v. Agripac, Inc., 39 F.3d 235, 237 (9th Cir. 1994)).

Here, like in Delaye, the Court found no ongoing administrative scheme. The benefits did not apply to a larger group of employees and were relatively straightforward. The longevity severance payment involved a “one-time, individualized calculation,” id., to wit: multiplying the value of Plaintiff’s salary and benefits by 1.68. Nor did the other severance benefits at issue, which required ongoing payments, rise to an ongoing administrative scheme, because there was no “issue of employer discretion, but rather one of contract interpretation.” Id. at *4. The Court thus found no preemption, and remanded to state court.

Amlani reminds employers that where benefits packages are highly individualized, and do not implicate administrative schemes or discretion, claims by employees for breach may remain in state court.


By: Brian Stolzenbach and Meg Troy

Seyfarth Synopsis: In Medina v. Catholic Health Initiatives, — F.3d —, 2017 WL 6459961 (10th Cir. Dec. 19, 2017), the Tenth Circuit held that a retirement plan sponsored by Catholic Health Initiatives (“CHI”), a church-affiliated healthcare organization, is a “church plan” under ERISA. This decision strengthens the litigation positions of religiously-affiliated healthcare systems who are facing similar lawsuits across the country and gives other courts a solid framework to analyze the relevant statutory provisions.

If a benefit plan is a “church plan,” it is exempt from the statute and is not required to adhere to ERISA requirements. A “church plan” is defined as “a plan established and maintained . . . for its employees (or their beneficiaries) by a church . . . .” 29 U.S.C. § 1002(33)(A). The statute continues:

A plan established and maintained for its employees (or their beneficiaries) by a church . . . includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church . . . if such organization is controlled by or associated with a church. . . .”

29 U.S.C. § 1002(33)(C)(i).

We have previously written about the Supreme Court’s June 2017 Advocate Health Network v. Stapleton decision here. In Advocate, the Supreme Court held that plans maintained by certain tax-exempt organizations controlled by or associated with a church may qualify as church plans. Specifically, a plan established by a non-church may qualify for the exemption if the plan is maintained by a “principal-purpose organization,” i.e., an organization whose principal purpose is administering or funding a plan and that is controlled by or associated with a church. That being said, the Court did not further explain what qualifies as a “principal-purpose organization” or what it means to be “controlled by” or “associated with” a church.

The Tenth Circuit analyzed these open issues by answering three questions: (1) Is the entity offering the plan a tax-exempt nonprofit organization associated with a church? (2) If so, is the entity’s plan maintained by a principal-purpose organization? That is, is the plan maintained by an organization whose principal purpose is administering or funding a plan for entity employees? (3) If so, is that principal-purpose organization itself associated with a church?

First, in determining whether CHI was “associated with” the Catholic Church, the Court looked to the language of 29 U.S.C. § 1002(C)(iv), which defines the phrase to mean sharing “common religious bonds and convictions” with a church. It found CHI was “associated with” the Catholic Church because of, among other things, CHI’s relationship with Catholic Health Care Federation, a “public juridic person” created by, and accountable to, the Vatican; CHI’s Articles of Incorporation provide it was organized exclusively to carry out religious purposes; and CHI was listed in the Official Catholic Directory.

Second, Court considered what it means to “maintain” a plan under 29 U.S.C. § 1002(C)(i). Analyzing the ordinary meaning of the term, the Court concluded that to “maintain” a plan means that an entity “cares for the plan for purposes of operational productivity.” Based on this definition, CHI’s Defined Benefit Plan Subcommittee, which administers the CHI Plan, was a “principal purpose organization” that “maintained” the plan for purposes of the exemption.

Third, the Court determined that the subcommittee was an “organization” because it satisfied the ordinary meaning of the term, which means “a body of persons . . . formed for a common purpose.” The Court also concluded that the subcommittee was “associated with” the Catholic Church because it is a subdivision of CHI and the plan itself stated that the subcommittee shared “common religious bonds and convictions” with the Catholic Church.

The Court also found that the church plan exemption, as applied to CHI’s retirement plan, did not violate the Establishment Clause of the First Amendment.


By: Meg Troy and Mark Casciari

Seyfarth Synopsis: The Seventh Circuit has now applied a clear error standard of review to a withdrawal liability arbitrator’s interpretation of a collective bargaining agreement, thus enhancing the role of the arbitrator in resolving withdrawal liability disputes.

On January 8, 2018, in Laborers’ Pension Fund v. W.R. Weis Company, Inc., — F.3d —, 2018 WL 316555 (7th Cir. Jan. 8, 2018), the Seventh Circuit applied the clear error standard of review to a withdrawal liability arbitrator’s interpretation of the parties’ underlying collective bargaining agreement (CBA) that required contributions to a multiemployer pension fund.

The Court enforced the arbitrator’s findings, a victory for the employer whose withdrawal liability was consequently reduced from over $600,000 to $0.

W.R. Weis Company, a stonework firm, was required by a CBA to contribute to the Laborers’ Pension Fund for work performed by members of the Laborers’ Union. In 2012, after several years of laborers performing no work for Weis and Weis remitting no contributions to the Fund, Weis formally terminated the CBA and the Fund issued a complete withdrawal assessment. Weis argued that it fell under the withdrawal liability building and construction industry exception, 29 U.S.C. § 1383(b).

Section 1383(b) states, in pertinent part:

In the case of an employer that has an obligation to contribute under a plan for work performed in the building and construction industry . . . .

A withdrawal occurs if (A) an employer ceases to have an obligation to contribute under the plan, and (B) the employer continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required. (Emphasis added.)

An arbitrator found that the language of the Weis Laborers’ CBA was ambiguous as to whether Weis continued to perform Laborers’ CBA work after ceasing Laborers’ Fund contributions. The arbitrator looked to past practice to resolve a CBA ambiguity. She focused on the fact that two previous audits and Fund business manager testimony showing Weis did not owe the Laborers’ Fund delinquent contributions for discontinued work.

The Seventh Circuit said that the arbitrator’s findings of fact may be set aside only if clearly erroneous, while the arbitrator’s legal conclusions are subject to de novo review.

The Laborers’ Fund sought de novo review. Weis argued that the clear error standard applied because the arbitrator’s review during the arbitration was limited to applying the facts to the language of the CBA rather than interpreting the statute itself. The Seventh Circuit agreed, and found no clear error.

This decision is significant because many withdrawal liability disputes turn on the meaning of a CBA. For example, 29 U.S.C. § 1385, in part, defines a partial withdrawal as a permanent cessation of an obligation to contribute “under one or more but fewer than all collective bargaining agreement[s].”

By Sam Schwartz-Fenwick and Tom Horan

Seyfarth Synopsis: The Supreme Court announced that it would not hear an appeal from the City of Houston in a case challenging the city’s ability to offer spousal benefits to same-sex spouses of municipal employees. By leaving in place the Texas Supreme Court’s ruling that the Obergefell decision does not, in fact, require such benefits to be extended, the decision to deny cert will return the case to the trial court, where plaintiffs will argue that the benefits violate Texas state law and seek an order forcing the city to rescind them.

In a case previously discussed in this blog here, the United States Supreme Court denied the petition for certiorari filed by the City of Houston, seeking to challenge the Texas Supreme Court’s ruling in Pidgeon v. Turner, No. 15-0688. The petition had asked the Court to consider whether the Supreme Court of Texas correctly decided that Obergefell v. Hodges “did not hold that states must provide the same publicly funded benefits to all married persons,” regardless of whether their marriages are same-sex or opposite sex.

While the Houston City Attorney said the city’s policy to provide benefits to same-sex spouses will continue despite today’s ruling, the decision to deny certiorari will return the case to the trial court in Texas, where plaintiffs seek an injunction, arguing that Texas state laws prohibit spending taxpayer funds on benefits for same-sex spouses. An order from the state court that the city must stop offering the benefits would likely bring the case back before the Supreme Court.

In light of the Supreme Court’s normal practice of only considering cases after they have reached final resolution, it was viewed as unlikely that the Court would grant the city’s petition here. Still, certiorari was seen as a possibility because of the Texas Supreme Court’s narrow reading of Obergefell as requiring states to license and recognize same-sex marriage, but not necessarily provide all recognized married person with the same publically funding benefits. Plaintiffs, in fact, argue that the right to marry does not “entail any particular package of tax benefits, employee fringe benefits or testimonial privileges.”

While it remains possible that the Texas state courts will determine that Houston cannot constitutionally deny benefits to its employees’ same-sex partners, it leaves in place, for now, the Texas Supreme Court’s decision that there is still room to explore “the reach and ramifications” of marriage recognition following Obergefell.

That this case continues on more than two years after the Supreme Court’s ruling legalizing same-sex marriage, demonstrates that opponents of marriage equality continue to view the courts as a viable vehicle to limit or reverse marriage equality. As this case and other challenges make their way through the courts, private employers and benefit plans considering modifying their benefit offerings to exclude same-sex spouses should tread very carefully, especially given the EEOC’s position that differential benefit offerings to same-sex spouses violates Title VII of the Civil Rights Act.


By Jonathan A. Braunstein and Michael W. Stevens

Seyfarth Synopsis: The Fourth Circuit found that the medical necessity of a given service constitutes a material element of representations regarding submissions for payment, potentially providing payors with another legal authority to fight health care fraud.

The Fourth Circuit recently affirmed two criminal convictions for health care fraud under 18 U.S.C. §§  1347 and 1349, finding that a misrepresentation as to the medical necessity of the service rendered was material for purposes of violating the statute. United States v. Palin, — F.3d —-, No. 16-4522, 2017 WL 4871381 (4th Cir. Oct. 30, 2017).

The two defendants operated an addiction medicine clinic and laboratory, which frequently processed urine tests. There were two kinds of urine tests, a simpler, less-expensive test and a more complicated, more expensive one.  When submitting lab orders, doctors would usually not specify which test they intended.  Generally, where patients were uninsured, the defendants would use the cheaper test, but where patients were insured, the defendants would use the more expensive test.

The district court convicted the defendants, finding that by this course of conduct, defendants “knowingly and willfully executed a scheme to defraud health care benefit programs” in violation of the health care fraud statute.

Defendants appealed, asserting that the district court erred in its analysis of materiality of the misrepresentation. Defendants asserted that there was no material misrepresentation, because they did not misrepresent to payors either the type of test they billed for or the frequency of the tests. See id. at *2.  Defendants impliedly argued that because they billed for services actually rendered, and told the payors which services were rendered, no fraud occurred.

The Fourth Circuit rejected defendants’ arguments, finding that “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation” Id. at *3 (citations omitted).

The Court found that “the misrepresentations here were material: insurers would not have paid for the sophisticated tests had they known those tests were unnecessary. . . . [T]he insurers here did not reimburse claims despite knowing [defendants] sought payment for tests that [defendants] knew were not medically necessary. . . . No evidence even suggests that medical necessity was anything less than a critical prerequisite to payment.” Id. (emphasis added).  The Fourth Circuit proceeded to reject defendants’ other arguments against their convictions.

Palin represents an important arrow in the quiver for payors alleging that billing payors for medically unnecessary services constitutes health care fraud.  Although this case involved a criminal conviction for fraudulently billing private insurers, the facts potentially apply equally to civil actions and disputes involving other payors, including ERISA Plans.  Stay tuned to this blog for further legal developments in health care fraud and provider billing litigation.

By: Chris Busey and Ron Kramer

Even when a claims administrator approves a claim for disability benefits, its job is not done. That principle was again demonstrated in the recent case Owings v. United of Omaha Life Insurance Co., No. 16-3128 (10th Cir. Oct. 17, 2017). The plaintiff’s claim for long-term disability benefits had been approved, but he claimed that the benefits paid were based on the wrong salary.

The plaintiff injured his back at work on July 1, 2013. Later that same day, the plaintiff was demoted from manager to supervisor with a corresponding reduction in his salary. The plaintiff returned home that day and claimed that he did not return to work the following day due to his back pain. The claims administrator approved and paid long-term disability due to plaintiff’s back injury, but based the amount on his reduced salary. It relied on the employer’s human resources representative, who said that plaintiff worked on July 2, making his date of disability at July 3. Plaintiff filed a claim seeking increased benefits based on his prior claim and appealed the denial. The defendant again relied on the employer’s human resources department in determining that the plaintiff worked on July 2, thus making his pay at the time of his disability the lower amount. After plaintiff filed suit in Kansas state court, the case was removed to the U.S. District Court for the District of Kansas. That court ruled in the defendant’s favoring, determining that it did not abuse its discretion in denying plaintiff’s claim.

On appeal, the Tenth Circuit overturned that decision, determining that the insurer abused its discretion in several ways. First, it held that the defendant’s interpretation of “disabled” under the plan was unreasonable. The defendant had determined that plaintiff’s disability did not begin until July 3 because he continued to perform at least one job duty on July 2. The plan, however, defined disability as being unable to perform “at least one of the Material Duties of Your Regular Occupation.” The defendant’s interpretation was thus inconsistent with plan’s terms. The Court also rejected the defendant’s argument that plaintiff was disabled, at the earliest, on July 2 because he worked at least part of July 1. The Court noted that the plan did not support the defendant’s interpretation that the date of disability must be difference than a claimant’s last day worked. This interpretation was unreasonable in light of the plan’s plain language. Finally, the Court found it unreasonable for the defendant to rely solely on the assertions of the employer’s human resources director in determining that last day worked. The defendant was focused solely on whether plaintiff worked on a specific day, and not on when plaintiff’s injury sustained on July 1 prevented him from performing one or more of the duties of his position. The Court remanded the case to the lower court with instructions to enter judgment for the plaintiff.

This case presents a few key takeaways. As always, the plan terms and, in particular, the plan’s definition of disability, must always be at the forefront of any benefits decision. The more unexpected result is the Court’s finding that a claimant’s last day worked and date of disability may be the same. This defies the typical interpretation many administrators use where the date of disability follows the last day worked. While the Court relied on the specific plan language at issue in making that determination it is noteworthy for claims administrators going forward. Further, the Court found it was unreasonable for the administrator to rely on the employer’s assertions alone. This case thus serves as a reminder to conduct an independent investigation.


By Amanda Sonneborn, Megan Troy, and Tom Horan

Seyfarth Synopsis: Since August 2016, sixteen elite colleges and universities have faced class action lawsuits related to management of their retirement plans. After five cases previously survived motions to dismiss, the University of Pennsylvania became the first college to secure a complete victory when accused of retirement plan mismanagement.

On September 21, 2017, the Eastern District of Pennsylvania ruled in favor of the University of Pennsylvania on every count in a proposed class action, which challenged the school’s retirement plan fees, investment lineup, and use of multiple plan record keepers. The proposed class action specifically alleged that both Penn and the administrator of its defined contribution retirement plan breached their fiduciary duty by “locking in” participants’ options to two investment companies, allowed the plan to pay too much in administrative fees, and charged excessive investment fees for access to an underperforming portfolio.

Citing Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011), the court rejected the claim that by “locking in” arrangements with two investment companies, the plan fiduciaries’ imprudently failed to monitor the investment options offered to participants. Specifically, the court found that plaintiffs’ claims amounted to impermissible second-guessing of the fiduciaries’ investment decisions just because they turned out to lose money. The court noted that, standing alone, the decision to “lock in” arrangements with investment companies is not imprudent. The court likened locking a plan into an arrangement with an investment company for a stated period to cell phone companies offering discounted rates in exchange for two-year contracts, and found that plans are often able to obtain favorable terms in exchange for committing to providing a predictable period of business to investment companies.

The court found that plaintiffs’ administrative fee claims failed because there are lawful explanations for not offering the absolute lowest-available fees to participants. In dismissing these claims, the court stated: “the plaintiffs need something more than a claim that there may be (or even are) cheaper options available. The plaintiffs must show that there were no reasonable alternatives given to plan participants to choose from, which the plaintiffs have not pled.”

Similarly, with respect to the unreasonable investment management fees claim, the court stated: “The plaintiffs’ argument that fiduciaries must maintain a myopic focus on the singular goal of lower fees was soundly rejected in Renfro.” Plaintiffs also argued that, by offering too many investment options, there was participant confusion. Because they failed to point to a single participant that was confused by the investment options, however, the court dismissed the claim. The court also found no cause of action for plaintiffs’ claims that certain funds were outperformed in the market.

The Court characterized plaintiffs’ prohibited transaction claims as an impermissible attempt to shoehorn their fiduciary breach claims into prohibited transaction rules. The court found that accepting plaintiffs’ arguments would mean that administrators commit prohibited transactions every time they contract with a party to provide services to a plan for money, and dismissed the claims because there was no evidence of an intent to benefit parties at participants’ expense.

This decision is a significant victory for the University of Pennsylvania and a change in course for the cases against colleges and universities. The Court’s reliance on Renfro requires plaintiffs in these cases to do more than second-guess fiduciary decisions where they lose money, and instead holds them to the burden to plausibly allege systematic mismanagement that left participants with a choice between participating in a poorly-performing retirement plan or no plan at all.  It remains to be seen whether the impact of Renfro will be limited to the Third Circuit or whether it will expand to other circuits as well.





By Jonathan A. Braunstein and Michael W. Stevens

Seyfarth Synopsis: The Ninth Circuit Court of Appeals recently confirmed that ERISA preempts state insurance law bans on discretionary clauses  for self-funded ERISA plans.

The Ninth Circuit has weighed into the national debate over discretionary clauses in ERISA plans, holding that ERISA preempts a state-law ban on discretionary clauses for self-funded disability plans, but not for fully-insured plans. Williby v. Aetna Life Ins. Co., No. 15-56394, Aug. 15, 2019 (9th Cir.).

In Williby, an employee of The Boeing Company sought disability benefits.  Boeing provided its employees with a self-funded short-term disability program, administered by Aetna.  The plan included a so-called discretionary clause, providing Aetna with “full discretionary authority to determine all questions that may arise,” including determination of benefits eligibility and scope.  Discretionary clauses effectively make an administrator’s determinations subject to a higher standard of review (abuse of discretion), rather than a de novo review.

The employee sought short-term disability benefits, which Aetna granted in part but denied in part. The employee then sued, accusing Aetna of wrongful denial.  The trial court reviewed Aetna’s determination de novo, finding in part that Cal. Ins. Code § 10110.6 — a ban on discretionary clauses in life or disability insurance — prohibited application of a more stringent standard of review. The trial court then held that plaintiff was entitled to more benefits than what Aetna had originally granted. Aetna appealed.

The Ninth Circuit reversed and remanded. The Court ruled that ERISA preempted § 10110.6, as applied to the self-funded plan at issue. The Ninth Circuit focused its analysis on the difference between a fully-insured and a self-funded benefit plan.  The Court held that there “is a simple, bright-line rule: if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it. . . . Thus, for a self-funded disability plan like Boeing’s, the saving clause does not apply, and state insurance regulations operating on such a self-funded plan are preempted.”

The Court then held that, because § 10110.6 was preempted, Aetna’s decisions were entitled to an abuse of discretion standard, and remanded for further proceedings.

Thus, while the national battle over the force of state discretionary clause bans continues to be fought, self-funded plans in the Ninth Circuit can point to Williby as setting a clear and bright line limit on the interplay of state insurance regulations and ERISA. In the coming years,   we expect to see many more cases presenting ERISA preemption issues in the near future, as it remains a very hot-button and heavily litigated issue.  Stay tuned to this blog for further updates.