ERISA’s attorney-fee provision, 29 U.S.C. §1132(g), affords a court discretion to award reasonable attorneys’ fees “to either party” in an action to recover benefits. The statute does not explicitly restrict fee awards to a “prevailing party,” a term of art which has been interpreted extensively in other statutory contexts. The Circuit Courts had been divided on whether a fee recovery in ERISA claims is limited to a prevailing party: the First, Fourth, Seventh and Tenth Circuits have applied a prevailing-party requirement, while the Second, Fifth and Eleventh have expressly rejected any such requirement.[2]

Recently, the U.S. Supreme Court resolved this conflict in Hardt v. Reliance Standard Life Insurance Co., No. 09-448, 2010 WL 2025127 (U.S. May 24, 2010), rejecting an appellate-court decision limiting ERISA fee awards to prevailing parties. The Court’s opinion leaves litigants with uncertainty, however, as to what level of success a claimant must achieve to become eligible for an award of attorneys’ fees, and what criteria should be applied to that determination.

Background

Bridget Hardt was a participant in a group Long-Term Disability (LTD) insurance plan administered by her employer, Dan River. Reliance Standard Life Insurance Company insured the plan, and both determined benefit eligibility and paid benefits. After having two surgeries for carpal tunnel syndrome in her wrists, Hardt stopped working at Dan River in January 2003.

In August 2003, Hardt applied to Reliance for LTD benefits. At the request of Reliance, Hardt received a functional capacities evaluation, which confirmed major limitations in Hardt’s neck, upper extremities and hands, but concluded that Hardt could perform sedentary work. Reliance denied LTD benefits on these findings, but reversed its decision after Hardt pursued an administrative appeal, and awarded Hardt temporary disability benefits for twenty-four months.

During this time, Hardt also was diagnosed with hereditary small-fiber neuropathy, a neural disorder, and applied to the Social Security Administration (SSA) for disability benefits. In support of the application, Hardt submitted two physician reports describing her symptoms and concluding that Hardt could not hold employment, even in a sedentary role, for a regular and sustained period. Both reports also explicitly opined that Hardt was not a malingerer. The SSA awarded disability benefits to Hardt, finding she could not return to her former employment or make an adjustment to perform other work.

Shortly thereafter, Reliance notified Hardt that her temporary disability benefits were about to expire. Hardt filed another administrative appeal, submitting the medical records related to her neuropathy, as well as the physician reports submitted to the SSA. Reliance asked Hardt to supplement this material with another functional capacities evaluation. Significantly, although Reliance was aware of Hardt’s neuropathy diagnosis, it did not ask the evaluators to review Hardt for neuropathic pain when it referred her for the updated evaluation. Reliance obtained two evaluations, one from a physician and one from a vocational rehabilitation counselor, and based on these reports, denied Hardt’s second appeal.

Hardt brought suit, alleging that Reliance wrongfully denied her claim for LTD benefits. The district court remanded Hardt’s LTD claims for additional administrative review, on the ground that Reliance ignored Hardt’s neuropathy and neuropathic pain in making its determinations. See Hardt v. Reliance Standard Life Ins. Co., 540 F. Supp. 2d 656 (E.D. Va. 2008). The court was highly critical of the opinions on which Reliance based its decision, noting that the Reliance physician’s report was “extremely vague and conclusory.” The court also found that Reliance had improperly ignored or disregarded much of the evidence submitted by Hardt, and held that Reliance’s denial of LTD benefits was “not based on substantial evidence.” Id. at 663. The court also found “compelling evidence” that Hardt was totally disabled due to her neuropathy, that “the plan administrator has failed to comply with the ERISA guidelines” and that Hardt “did not get the kind of review to which she was entitled under applicable law.” Accordingly, the court gave Reliance thirty days “to adequately consider[] all the evidence,” failing which, the court would enter judgment for Hardt. Id. at 664.

Following the remand, Reliance awarded Hardt both prospective LTD benefits and accrued past benefits. Hardt moved in the district court for attorney’s fees and costs under ERISA’s fee provision, 29 U.S.C. § §1132(g)(1). The district court awarded Hardt’s attorney’s fees, applying a five-factor test developed under other federal fee-shifting statutes.[3] On appeal, the Fourth Circuit reversed the award of attorney’s fees, holding that Hardt had not established that she was a “prevailing party.” Hardt v. Reliance Standard Life Ins. Co., 336 Fed. Appx. 332, 335-36 (4th Cir. 2009) (per curiam). The decision was based on the Fourth Circuit’s conclusion that a fee claimant qualifies as a “prevailing party” only if it obtains an “enforceable judgment on the merits” or a “court-ordered consent decree.” Id. at 335 (internal punctuation omitted). The Court of Appeals reasoned that, because the remand order “did not require Reliance to award benefits to Hardt,” it did not constitute an “enforceable judgment on the merits,” thereby precluding Hardt from establishing prevailing-party status. Id. at 336 (internal punctuation omitted).

The Supreme Court’s Decision

Hardt filed a petition for a writ of certiorari seeking review of two questions. First, did the Fourth Circuit correctly hold that ERISA fee-shifting status limits fees recoveries to a “prevailing party?” Second, is an order remanding a claim for reconsideration of benefits eligibility sufficient to support a fee award under ERISA? The Supreme Court granted certiorari on January 15, 2010 and held oral argument on April 26, 2010.

On May 24, the Court unanimously[4] reversed the Fourth Circuit in an opinion authored by Associate Justice Clarence Thomas. The Court made short work of the Circuit Court’s conclusion that ERISA’s fee-shifting provision included a prevailing-party requirement, stating: “[b]ecause Congress failed to include in §1132(g)(1) an express ‘prevailing party’ limit on the availability of attorney’s fees, the Court of Appeals’ decision adding that term of art to a fee-shifting statute from which it is conspicuously absent more closely resembles inventing a statute rather than interpreting one.” Hardt, Slip Op. at 9 (internal punctuation omitted).

The Court did not, however, relieve the participant altogether of any required showing of success. Invoking the so-called “American Rule,” which posits that litigants bear their own attorney’s fees unless a statute or contract provides otherwise, the Court concluded that “some degree of success on the merits” was required before a court could make a discretionary fee award. The Court then elaborated on the “some success on the merits” standard:

A claimant does not satisfy that requirement by achieving “trivial success on the merits” or a purely procedural victor[y],” but does satisfy it if the court can fairly call the outcome of the litigation some success on the merits without conducting a “lengthy inquir[y] into the question whether a particular success was ‘substantial or occurred on a ‘central issue.’”

Id., Slip Op. at 12.

The Court held that Hardt satisfied this standard in light of Reliance’s initial failure to conduct a review that complied with ERISA; the lower court’s statement that there was “compelling evidence” that Hardt was totally disabled by her neuropathy; and Reliance’s subsequent reversal of its decision and award of LTD benefits once the district court ordered a full review of Hardt’s records Id. It therefore concluded that the district court “properly exercised” its discretion to award Hardt’s attorney’s fees, and reversed the Fourth Circuit’s decision vacating the fee award. However, the Court declined to decide whether an order remanding a benefits claim for further administrative review would, without more, support a fee award.

In the course of the opinion, the Court also stated that application of the five-factor test applied by the district court and numerous other courts was “not required for channeling a court’s discretion when awarding fees” under ERISA. The Court nevertheless indicated in a footnote that a court “may consider” these five factors after determining that a claimant has achieved enough success to be eligible for a fee award. Id., Slip Op. at 12 & n.8.

Proskauer’s Perspective

Hardt will clearly change the law in those circuits that had imposed a prevailing-party requirement on parties seeking a fee award in ERISA cases. The decision may also influence other significant issues impacting attorney’s fee awards, but as to these issues the Court’s guidance is much less clear.

First, in rejecting the five-factor test as a requirement for evaluating fee requests, the Court’s opinion in Hardt potentially untethers future ERISA fee awards from a well-understood decisional framework. In the wake of Hardt, courts “may consider” these five factors, but appear free to fashion their own analytical approaches.

The newly enunciated “some success on the merits” standard may create even greater confusion, by leaving open the question about what level of success is adequate to support a fee award. The potential confusion is compounded by the Court’s refusal to resolve the issue of whether a remand for further administrative review, without more, makes a claimant eligible for a later fee award. In many cases, courts will order further administrative review to remedy a procedural defect, without commenting specifically on the merits of the underlying claims. The prospects for these types of remands will likely increase in the wake of the Supreme Court’s recent decision in Conkright v. Frommert, 130 S.Ct. 1640 (U.S. Apr. 21, 2010), which held that deference to the plan administrator is required even where the administrator had already made good-faith errors in determining a claim for benefits. In those situations, one can expect claimants to argue that Hardt makes them eligible for a fee award as a matter of course; the plans, on the other hand, will likely seek to draw the contrary inference from Hardt’s refusal to state that claimants are automatically eligible for a fee recovery where a remand is followed by a benefit award.

It also is unclear whether the Hardt decision will have the desired effect of increasing out-of-court resolutions of benefit claims. At first blush, the decision would appear intended to do precisely that, insofar as it would appear to deter the practice of “tactical mooting” – maneuvering by plan administrators to moot a fee request by awarding benefits to those claimants who are successful in obtaining additional, court-ordered review. Both Hardt and some amici curiae expressed concerns that, by leaving open the prospects for such tactical mooting, the prevailing-party rule gave plan administrators an incentive to force claimants to litigate their claims. Given the uncertainty that remains, however, as to whether a participant will be entitled to attorney’s fees if benefits are awarded following an ordinary remand, the Hardt decision may discourage administrators from awarding benefits following such remands, and may instead encourage further litigation, out of fear that a decision awarding benefits could result in substantial attorney’s fee awards.

In short, while resolving one issue with respect to attorney’s fees awards that had divided the courts, Hardt left us with many other issues, of equal or greater practice significance, that may similarly divide the courts in the future.