Wrongful denial of employee benefits will not expose plan fiduciaries to equitable remedies – such as disgorgement of profits – where restoration of benefits is adequate to make the claimant whole, says the Sixth Circuit in Rochow v. Life Ins. Co. of N. Am., No. 12-2074 (March 5, 2015). So the Court vacated the district court’s $3.8 million disgorgement order against the Life Insurance Company of North America (LINA) and returned the case to the district court to determine whether and how much prejudgment interest should be awarded. But disgorgement might still be available to redress separate and distinct injuries, such as where a fiduciary breach is found to be part of an improper plan-wide claim-handling methodology, which might necessitate disgorgement to assure proper claims processing in the future.
The district court in Rochow found that denial of long-term disability benefits by LINA was arbitrary and capricious, and granted judgment in favor of the claimant under the Employee Retirement Income Security Act § 502(a)(1)(B), awarding restoration of benefits wrongfully withheld. The claimant then sought additional recovery – namely, disgorgement of profits under § 502(a)(3) – based on LINA’s breach of its fiduciary duty. The district court again granted summary judgment in favor of the claimant, and LINA appealed. The Sixth Circuit affirmed, but the case was reheard en banc by the entire Sixth Circuit, which vacated the disgorgement order; clearly a major victory for LINA, but the disgorgement door remains ajar.
The full court ruled that recovery of other equitable relief in addition to wrongfully withheld benefits was an impermissible duplicative recovery because the claimant could not demonstrate that recovery of benefits was inadequate to make him whole or that there was a separate and distinct injury requiring redress. The Sixth Circuit relied on Varity Corp. v. Howe, 516 U.S. 489 (1996), where the Supreme Court explained that § 502 (a)(3) “functions as a safety net, offering appropriate equitable relief for injuries caused by violations that § 502 does not elsewhere adequately remedy.” Thus, the Sixth Circuit held that where restoration of benefits (plus attorneys’ fees and perhaps interest) is adequate to make the claimant whole, there is no need for other equitable relief under § 502(a)(3) since it would constitute a double recovery by the claimant.
The decision leaves room, however, for an award of equitable relief under § 502(a)(3) where the restoration of benefits alone is not sufficient to make the claimant whole or where there is an injury separate and distinct from the denial of benefits. By way of example, the court pointed to its earlier decision in Hill v. Blue Cross and Blue Shield of Michigan, 409 F.3d 710 (6th Cir. 2005), where it found a separate and distinct injury beyond the mere derivation of benefits necessitating equitable relief under 502(a)(3). There, the court ordered other equitable relief (injunction), in addition to payment of benefits due, to redress an alleged improper plan-wide claim-handling methodology, which the court found to be a separate injury affecting the entire plan.
A concurring judge writing separately in Rochow took the majority’s example one step further. She suggested that disgorgement might be appropriate in a case where the denial of benefits is found to have been based on an organizational policy rather than on a particular claims examiner’s error, leading to the conclusion that disgorgement is necessary to deter similar improper decision-making in the future. This judge would have returned the matter to the district judge for further consideration under the clarified standard whereas the dissent would have affirmed the disgorgement order.
Thus, Rochow does not completely foreclose the possibility of disgorgement in other cases. Where there is a breach of fiduciary duty and the remedies otherwise available under § 502 are not sufficient to make the claimant whole or there is a separate and distinct injury requiring redress, other equitable relief – including disgorgement – might be available, even after Rochow.