ERISA gives courts discretion to allow parties to ERISA lawsuits to recover “a reasonable attorney’s fee” from the opposing party, but is silent on when such a recovery is appropriate. In 2010, the U.S. Supreme Court held that a party seeking to recover attorney’s fees under ERISA need not completely prevail in the lawsuit. The party instead simply needs to obtain “some degree of success on the merits.” The Court left open what “some degree of success on the merits” actually means, and the lower federal courts have grappled with that question ever since.
In 2013, the U.S. Second Circuit Court of Appeals opined on the issue. In Scarangella v. Grp. Health, Inc., 731 F.3d 146 (2d Cir. 2013), the Second Circuit broadly defined “some degree of success on the merits” so that in some circumstances, a party may be able to recover its attorney’s fees even if it settles an ERISA claim instead of litigating to a final judgment. In Scarangella, one party voluntarily dismissed its own claims and settled the case after the court issued an opinion dismissing one of the settling party’s claims and expressing skepticism about the remaining claims. The court held that the opposing party obtained “some degree of success on the merits” and could seek fees under ERISA because “judicial action” ultimately led to the settlement, even though the court did not conclusively decide the entire case.
The U.S. Third Circuit Court of Appeals recently expandedScarangella’s broad rule. In Templin v. Independence Blue Cross, 2015 U.S. App. LEXIS 7624 (3d Cir. May 8, 2015), the court held that a party may make a claim for attorney’s fees under ERISA whenever “litigation activity” spurs a settlement, even if no formal judicial decision precedes the settlement.
In Templin, the parties litigated and resolved the underlying ERISA claim for benefits in the Plan Participant’s favor. All that remained was the Plan Participant’s informal claim for prejudgment interest. At a pre-trial conference, the trial court encouraged the parties to settle this issue, but they were unable to do so. Consequently, the prevailing Plan Participant amended his complaint to formally seek prejudgment interest. At a subsequent pre-trial conference, the insurers caved and agreed to pay interest, thus settling the case. The Plan Participant then moved for fees under ERISA. CitingScarangella, the trial court denied the request because no formal judicial action—such as an opinion regarding the claim—spurred the settlement.
On appeal, the Third Circuit disagreed with the lower court’s narrow view of Scarangella. It concluded that “evidence that judicial activity encouraged” the settlement is “not necessary.” Rather, “all that is necessary is that litigation activity”—such as filing or amending a complaint—“pressured a defendant to settle.”
In so holding, the Third Circuit claimed that it was not departing from Scarangella because Scarangella’s reliance on “judicial activity” did not preclude fees “in a broader set of circumstances,” such as a “settlement spurred by” non-judicial “litigation activity.” We believe that the Third Circuit misread Scarangella. We read Scarangella to clearly require some sort of formal judicial action before ERISA’s fee-shifting provision may apply. To us, Templin clearly expands on Scarangella’s broad rule and allows fee claims in much broader circumstances.
Though broader, Templin generally reaffirms the cautionary lesson from Scarangella: that ERISA defendants should carefully scrutinize difficult benefits claims before litigation begins, rather than during litigation or settlement negotiations. Historically, ERISA defendants were able to make a difficult benefits determination at the administrative level, re-evaluate the claim during litigation, and decide to settle it at some later point during the litigation without worrying about liability for the other side’s attorney’s fees. Such practices are riskier under cases like Scarangella and Templin, and particularly so underTemplin. Indeed, under Scarangella, ERISA defendants at least have the comfort of knowing that they would likely be safe as long as they settled before the court formally opined on the claims’ merits. But Templin’s broader “litigation activity” rule rejects that safe harbor. Thus, ERISA defendants should quickly and carefully evaluate disputed benefits claims in the first instance whenever possible. Moreover, Templin sternly reminds settling defendants that whenever an ERISA claim is settled after litigation has begun, defendants should always obtain from the other party a written waiver of its right to seek attorney’s fees under ERISA.
For now, neither Templin nor Scarangella is controlling in other federal jurisdictions (including Ohio), where parties can still argue for a higher, narrower standard. But the federal courts that decided Templin and Scarangella sit over the federal courts of some large states (such as New York and Pennsylvania) and have ample persuasive clout. So, we believe that other federal courts are likely to follow suit and announce similarly broad standards. Potential ERISA defendants in Ohio and other jurisdictions would be wise to plan ahead.