Editor’s Overview

This month, we lead with an article addressing the Supreme Court’s decision in CIGNA Corp. v. Amara. The opinion provides useful guidance with respect to the content of plan documents, but the eventual impact of this decision on the scope of available ERISA equitable remedies remains uncertain. A second article reviews the pending cases before four United States Courts of Appeals addressing the constitutionality of the Patient Protection & Affordable Care Act (PPACA) (now called the Affordable Care Act (ACA)). Finally, we focus on a recent Seventh Circuit decision, Peabody v. Davis, that exposes potential risks for the fiduciaries of eligible individual account plans.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest.  

On May 16, 2011, the U.S. Supreme Court issued its long awaited opinion in CIGNA Corp. v. Amara, Case No. 09-804. Certiorari was granted to address the question of what showing of harm, if any, a participant must demonstrate to recover on a claim where the Summary Plan Description (SPD) conflicts with the terms of the plan document. Related to this question was the issue of what cause of action the plaintiffs could proceed under in these circumstances.

The Court specifically addressed these issues by rejecting the district court’s finding that relief was available on a claim for benefits under Section 502(a)(1)(B) of ERISA and that plaintiffs were entitled to relief on a showing of “likely prejudice.” Instead, the Court stated that the relief that the district court ordered may be available under Section 502(a)(3) of ERISA, to the extent the relief ordered coincided with, and plaintiffs satisfied the conditions for, relief that would be available in a traditional court of equity. Although the Supreme Court, in dicta, discussed what remedies might be available in equity, and what showing would be required for such relief, the decision left many questions unanswered. As a result, the decision left both the plaintiffs’ and defendants’ bar with opportunities to claim “victory” for the moment, while leaving many crucial issues to be decided another day.

Factual Background

Plaintiff Janice C. Amara and the other plaintiffs (Plaintiffs) were, when the lawsuit was filed, current or former employees of defendant CIGNA Corp. (CIGNA). In 1998, CIGNA amended the CIGNA Pension Plan (Plan) from a traditional defined benefit formula to a cash balance formula. Under CIGNA’s traditional defined benefit formula, employees earned benefits over time based on their service and salary and, upon retirement, received an annuity with their annual benefit payable for life. Following the amendment to the Plan, each participant was provided with a starting balance in his/her cash balance account, which was calculated by taking the frozen annual benefit earned under the prior defined benefit plan and discounting it into a lump sum amount using prescribed interest rate and mortality assumptions that were less favorable to participants than the assumptions required by statute to calculate a lump sum retirement benefit. Thereafter, participants earned annual service and salary credits plus quarterly interest credits. Because the balance in the cash balance account could be worth less than the present value of the frozen defined benefit calculated under the statutorily prescribed rates, the Plan provided that participants would receive the greater of their frozen defined benefit or their cash balance benefit. For many participants, there was a period of time, known as the “wear-away” period, during which their benefits did not increase because their frozen benefit under the defined benefit plan remained greater than the benefit accrued under the cash balance plan.

Both before and following the Plan’s conversion to a cash balance formula, CIGNA issued communications to participants regarding the operation of that formula. The disclosures included those that are required by statute, such as the ERISA Section 204(h) notice of amendments that may reduce benefit accruals, the summary of material modification (SMM), SPDs, annual benefit statements and, upon request, a copy of the Plan itself.

Procedural History

In 2001, Plaintiffs filed a class action lawsuit against CIGNA and the CIGNA Pension Plan (Defendants), alleging that the conversion of the Plan to a cash balance formula discriminated on the basis of age and violated ERISA’s non-forfeiture and anti-backloading rules. In addition, Plaintiffs alleged that the SPD was deficient for failing to properly communicate the wear-away effect. According to Plaintiffs, the SPD mistakenly led participants to believe that they would receive the full value of their frozen benefit under the defined benefit plan plus whatever new benefits were accrued under the cash balance plan. Plaintiffs sought certification of a class of approximately 27,000 participants, which was later certified, and relief for the putative class under ERISA Section 502(a)(1)(B), which permits a participant to sue to recover benefits due under the terms of the plan, and ERISA Section 502(a)(3), which entitles participants to recover equitable relief for breaches of the Plan or ERISA, including deficient SPDs, fiduciary breaches for material misrepresentations, and/or equitable estoppel.

Following a bench trial, the district court issued two opinions, one as to liability and one as to damages. In the liability opinion, the district court concluded that the Plan’s cash balance formula was not age discriminatory and did not violate ERISA’s anti-backloading and non-forfeiture rules. However, the district court concluded that the Plan’s SPDs were deficient under ERISA because they failed to adequately disclose the “wear-away” phenomenon to participants. For the same reason, the district court also held that CIGNA’s 204(h) notice and SMM were deficient as well.

Following the opinion as to liability, the district court issued its opinion as to remedies. The district court determined that it should fashion relief for the deficient SPD claim, rather than the deficient 204(h) notice and SMM claims because: (i) the statutorily-mandated relief for the 204(h) violation would place the participants in a worse position by invalidating entirely the cash balance benefits, without restoring the prior benefits (which were frozen pursuant to a separate amendment); and because the court believed that monetary relief was unavailable under ERISA Section 502(a)(3), the vehicle for relief for a deficient SMM. With respect to the deficient SPD claim, the court determined that, pursuant to ERISA Section 502(a)(1)(B), the cause of action for contractual benefit claims, it could award each participant the benefit that the SPD purported to offer: the frozen traditional defined benefit plus his/her cash balance benefits. It awarded such relief via the issuance of an injunction to reform the plan, and another injunction directing payment to the retirees of the amount due them under the plan as reformed.

The court determined that all members of the class were entitled to this relief because they were “likely harmed” by the notice violations. The district court applied a “likely harm” standard because that it found that standard to be akin to the “likely prejudice” applied by the Second Circuit in other instances of statutory or regulatory violations. See, e.g., Burke v. Kodak Retirement Income Plan, 336 F.3d 103 (2d Cir. 2003). As a result, the court made no participant-by-participant evaluation of injury.

Both parties appealed the district court’s opinions as to liability and relief to the Second Circuit. Following briefing by the parties, the Second Circuit issued an unpublished, summary opinion affirming the district court’s rulings.

Both parties filed writs of certiorari with the Supreme Court. Defendants petitioned for certiorari from the U.S. Supreme Court on the issue of what showing of harm, if any, a participant must demonstrate to recover on a claim when the SPD conflicts with the terms of the plan document. Plaintiffs petitioned for certiorari on two questions: (1) whether CIGNA’s challenge to the “likely harmed” standard is proper for appeal; and (2) whether after a finding of misleading statements in the SMM and SPD, a district court is precluded from finding a violation of ERISA’s disclosure requirements unless the district court conducts individual hearings into how each individual participant detrimentally relied on the misleading statements.

On June 28, 2010, the U.S. Supreme Court granted Defendants’ petition for certiorari as to the following issue: When a corporation’s summary plan description and actual retirement benefit plan are inconsistent, is the proper standard for measuring harm a standard of “likely harm” rebuttable by the defendant after a showing of “harmless error,” or must a plaintiff show “detrimental reliance” on the inconsistency. The Supreme Court held Plaintiffs’ petition in abeyance, pending decision as to Defendants’ certiorari petition. On May 23, 2011, following its ruling on Defendants’ petition, the Supreme Court granted plaintiffs’ writ of certiorari with respect to the relief for the 204(h) and SMM claims, and vacated and remanded that part of the district court’s decision, so as to permit further consideration of those issues consistent with the Supreme Court’s ruling.

The Supreme Court’s Opinion

On November 30, 2010, the Supreme Court heard oral argument from the respective parties and the Department of Labor, which filed an amicus curiae brief supporting the plaintiffs’ position. On May 16, 2011, the Supreme Court handed down a unanimous decision (8-0, with Justice Sotomayor not participating), which (i) rejected the district court’s holding that reformation of the plan was appropriate relief under ERISA Section 502(a)(1)(B), and remanded the decision for consideration of whether the relief the district court ordered was available under Section 502(a)(3). The opinion of the Court was written by Justice Breyer. Justice Scalia filed a concurring opinion, joined by Justice Thomas, which joined Justice Breyer’s opinion insofar as it rejected the Plaintiffs’ claim under Section 502(a)(1)(B) but disagreed with the opinion insofar as it proceeded to discuss the standards for relief under Section 502(a)(3) of ERISA.

The Supreme Court rejected the argument that an SPD could be a binding contract that trumps the underlying plan document. Rather, the Court stated, an SPD is meant to be a summary of the underlying plan document, written by a different entity (the plan administrator) than the entity responsible for the plan document (the corporate plan sponsor), with the entity responsible for the SPD being subject to ERISA’s fiduciary provisions while the entity responsible for the plan document not subject to ERISA’s fiduciary provisions. Because an SPD is not the plan document, the Supreme Court held that the district court erred in ordering relief under ERISA Section 502(a)(1)(B), which only authorizes relief for enforcement of a plan’s terms.

The Supreme Court then stated, however, that the relief the district court entered might be available as “other equitable relief” under Section 502(a)(3), pursuant to one of the following theories: “estoppel,” “reformation,” or “surcharge.” Rather than impose a specific, uniform burden of proof for sustaining a claim for such relief, the Supreme Court stated that the required burden of proof would depend on the specific equitable remedy being sought.

According to the Court, equitable reformation, the remedy that appeared to the Court to most closely resemble the lower court’s direction that the plan be reformed to provide a benefit pursuant to an “A plus B” formula, was appropriate where “‘fraudulent suppression, omission, or insertions…materially…affect[ed]’ the ‘substance’ of the contact.”

The Court further observed that, insofar as the lower court also issued an injunction directing that retired participants receive additional payments to comport with the plan as revised, such relief might be available under the equitable theory of “surcharge.” To sustain a claim for surcharge, the Court stated, a plaintiff must prove actual harm by a preponderance of the evidence. The Court clarified that “actual harm may sometimes consist of detrimental reliance, but it might also come from the loss of a right protected by ERISA or its trust-law antecedents, however, that actual harm might not take the form of detrimental reliance on the terms of the SPD.”

In ruling that monetary relief may be available under a surcharge theory, the Supreme Court distinguished its prior rulings in Mertens v. Hewitt Assocs., 508 U.S. 248 (1993) and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), stating that while these decisions precluded monetary relief for claims against non-fiduciaries, monetary relief was available in trust law where there is a breach of trust.

Justice Scalia in his concurring opinion observed that the surcharge remedy must be calibrated to the harm alleged, and thus would not necessarily take the form of the remedy ordered by the district court.

Proskauer’s Perspective

It is important to separate out the holdings contained in the Supreme Court’s decision, which will likely have a broad impact, and the dicta, the impact of which is far less clear.

The Court clearly held that the SPD is not a contract and cannot supersede the plan document, and, thus, there is no relief available under Section 502(a)(1)(B) for a faulty communication. This holding presumably extinguishes any efforts by plaintiffs’ attorneys to obtain automatic relief, absent any showing of harm, for a miscommunication, whether it is contained in an SPD or elsewhere. The ruling also should serve to encourage plan sponsors to issue SPDs that, consistent with the statutory intent, summarize the terms of the plan, rather than re-state all the intricacies contained in the formal plan document for fear that any omission, re-characterization or simplification will effectively lead to a claim that alters the plan’s terms.

With respect to the relief available under Section 502(a)(3) for a miscommunication, the Court’s dicta leaves many questions unanswered. On the one hand, it is clear that there is no presumption of harm; rather, the plaintiff will bear the burden of proving whatever harm is required to sustain the elements of an equitable claim for relief. However, the Court said little on what evidence would constitute “fraud,” sufficient to sustain a reformation claim. With respect to the “surcharge” theory, the vehicle identified for awarding monetary relief to the retirees, the Court stated that “actual harm” was required, but it is far from clear what evidence would sustain a showing of actual harm in a cash balance conversion case, let alone in other contexts. As Justice Scalia pointed out, relief under a “surcharge” theory should be calibrated to the actual harm shown, which should call into question whether the district court should award payment of the “A plus B” benefit, as it originally ordered. Finally, the Supreme Court’s opinion makes no mention of the suitability of these equitable claims for relief to class certification, even though the issue was mentioned in passing during the oral argument.

In short, CIGNA Corp. v. Amara laid the groundwork for future litigation. It outlined the battlefield, but not the victor.