The Supreme Court has now handed down a significant ERISA decision in Conkright v. Frommert (April 21, 2010). Chief Justice Roberts, joined by a majority of a divided Court, held that a court must apply a deferential standard of review to a plan administrator's new reasonable interpretation of a plan even if the plan administrator's first interpretation of the plan on the same issue was wrong.
The decision strikes down one rationale applied by the lower court to substitute its own interpretation for the plan administrator's, and is likely to discourage many other such attempts.
Click the case name above for a copy of the opinion and dissent.
Background. Conkright was an ERISA suit by Xerox Corporation pension plan participants against the plan and its administrators over the way the plan calculated current retirement benefits for employees who had worked at Xerox, left with a lump-sum benefit from the plan, and later returned to work at Xerox to earn additional pension benefits. When participants left the second time, the plan administrator initially calculated the benefit due, as had originally been provided in the plan, by subtracting not just the cash amount of the first lump sum but also the earnings that amount would have generated if left in the plan (the so-called "phantom account method").
Although the plan initially won summary judgment at the district court, the Second Circuit Court of Appeals reversed, noting that the "phantom account method" for making this determination had actually been removed as a plan provision in an earlier amendment to the plan, that plaintiffs did not have adequate notice of how the computation would now be made, and that the plan administrator's interpretation was unreasonable. The Second Circuit remanded the case to the district court to fashion a solution which would employ equitable principles.
In that second district court proceeding, the plan administrator submitted an affidavit proposing to apply interest to the original distribution to reflect the time value of the money distributed, while the plaintiffs argued for subtracting only the actual lump sum distributed. The district court did not apply a deferential standard of review to the plan administrator's proposal. Instead, it decided to implement the plaintiffs' preferred approach, finding that it conformed to the result the plaintiffs would have expected when they decided to re-join Xerox. The plan appealed to the Second Circuit, which affirmed the district court. In a 5-3 decision (Justice Sotomayor did not take part), the Supreme Court has now reversed both lower courts and ruled that the district court owed the plan administrator's second approach a deferential standard of review.
The Court's Opinion. Chief Justice Roberts framed the issue as "whether a single honest mistake in plan interpretation justifies stripping the administrator of ... deference for subsequent related interpretations of the plan," and answered that it did not. In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the Supreme Court applied trust law principles to hold that where plan documents give the administrator power to construe disputed or doubtful terms, the administrator's decision would be upheld if reasonable. The Conkright opinion interpreted the Court's later decision in Metropolitan Life Ins. Co. v. Glenn, 554 U.S. --- , 128 S. Ct. 2343 (2008) to "expand" that approach by establishing that deferential review remains appropriate even in the face of a plan administrator conflict of interest.
Against this background the majority was unwilling to create an "ad hoc" exception to Firestone deference based on a plan administrator's "single honest mistake" -- a phrase repeated throughout the opinion. It found that such an exception was not required by principles of trust law. Although the Conkright majority and the dissent engaged in an extended debate over whether or when traditional trust law would allow a court to override a trustee's discretionary authority, the majority ultimately concluded that it did not really matter. Trust law was only a starting point for ERISA law, and the majority identified numerous reasons why ERISA required deference to plan administrator decisions, at least in the absence of actual bad faith or multiple errors. These ERISA considerations included the need not to discourage employers from establishing plans, the efficiency of resolving disputes by internal administration rather than judicial proceedings, and the need for nationwide uniform interpretations of plans rather than inconsistent interpretations by courts in different jurisdictions.
Both the plaintiffs and the United States Department of Labor argued that the Plan administrator was not owed what they called "rerun deference" because it had initially "acted beyond the bounds of a reasonable judgment." They argued that a rule giving such deference would lead employers to put forward vague retirement plans which administrators would initially interpret in terms very favorable to the employer and then proceed iteratively to re-interpret the plans until a court accepted a bare minimum interpretation. The majority in Conkright rejected this argument, saying that "the interests in efficiency, predictability, and uniformity—and the manner in which they are promoted by deference to reasonable plan construction by administrators—do not suddenly disappear simply because a plan administrator has made a single honest mistake." The Court further defined the deference owed to the Plan administrator as "It means only that the plan administrator's interpretation of the plan will not be disturbed if reasonable."
Implications. Conkright emphatically answers the narrow question whether a "single honest mistake" allows a court to decline deference to plan administrator decisions. Beyond that, it tilts the ERISA scales rather strongly in favor of plan administrators in other significant ways:
- After Glenn, Courts of Appeal have taken a variety of approaches to the issue involved there of plan administrators acting under a conflict of interest. The Supreme Court's reading of Glenn in Conkright may make those courts more reluctant to rely on Glenn to overturn plan administrator decisions in conflict situations.
- More broadly, the same considerations the Supreme Court marshaled to reject a "prior wrong decision" exception to judicial deference can be -- and may well be -- applied to virtually any other attempt to override a plan administrator decision, making all such decisions harder to overturn.
- The Court's emphasis on the standard for deference -- to uphold plan administrator decisions "if reasonable," subject to outer limits of multiple errors and "bad faith" -- is likely lead other courts to formulate the standard in those terms (though of course those terms still leave considerable room for further interpretation).
- Plans may be able to design a litigation strategy that aims at preserving the plan administrator's ability, through remand or otherwise, to reconsider the issue and render another decision if the first is rejected as unreasonable.
- Finally, there are many circumstances beyond loss of judicial deference where plan administrators (and plans and employers) might feel unfairly penalized because of "a single honest mistake." The broader implications of a possibly more relaxed approach to "honest" ERISA violations remain to be seen.
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