These days, even small victories can add up to hefty fee awards for ERISA plaintiffs’ counsel.

Under the bedrock litigation principle known as the “American Rule,” each party generally pays its own attorneys’ fees and costs.  But for most ERISA lawsuits, the court may award reasonable attorneys’ fees and costs to either party.  Until recently, courts have split on whether only prevailing parties were eligible for fees and costs in wrongful benefit denial cases.  In 2010, the Supreme Court in Hardt v. Reliance Standard Life Insurance Company, 130 S. Ct. 2149 (2010), held that the ERISA fee-shifting provision contained in 29 U.S.C. § 1132(g)(1) does not require a fee claimant to be the “prevailing party,” (unlike other ERISA fee-shifting provisions), rather it merely requires a fee claimant to have achieved “some degree of success on the merits.”

How much success is “some” success, you ask?  According to the Supreme Court, one must only achieve more than a “trivial success on the merits” or a “purely procedural victory.”  Attempting to apply this blurry line, courts have started awarding attorneys’ fees for rather nominal victories.

For example, some courts have found remand of a benefit decision to the plan administrator to be success on the merits, even though the benefit may ultimately be denied.

In California, a plaintiff was awarded $62,000 in attorneys’ fees and costs where, two weeks after the complaint was filed, the claims administrator reversed a coverage denial based on evidence submitted after the initial denial and just before the lawsuit was filed.  Pomerlau v. Health Net of California, Inc., C.D. Cal., No. 2:11-cv-01654-DDP-FMO, 11/15/12.  The Ninth Circuit also found that a participant had achieved some degree of success if the plan has “paid up only under the cloud of litigation.”  Bryant v. Cigna Healthcare of Cal., Inc., 9th Cir., No. 11-57249, 9/30/13 (unpublished).

What about a class of litigants who sought a billion dollars in damages but was awarded none?  The court awarded the class over $1.8 million in attorneys’ fees and costs because the lawsuit forced the plan to correct a scrivener’s error in the plan document.  Young v. Verizon’s Bell Atl. Cash Balance Plan, 783 F. Supp. 2d 1031 (N.D. Ill. 2011).  The Second Circuit also recently ruled that a pension plan participant was eligible for fees despite having her claims dismissed because her lawsuit led the plan administrator to amend the plan.  Carlson v. HSNC-N. Am. (US) Ret. Income Plan, 2d Cir., No. 12-1209-cv, 9/12/13 (unpublished).

Decisions like these make for bad public policy.  They may encourage continued litigation even where potential benefit recoveries could be small because a plan that reverses its good faith benefit denial to avoid litigation costs may risk an award of attorneys’ fees.  Plan amendments could be delayed simply because a plaintiff may argue that her litigation lead, at least in part, to the revision.

Facing an ERISA lawsuit?  Don’t grab your checkbook just yet.  Plan sponsors should consider adopting the following practices to avoid or limit potential exposure for plaintiffs’ fees and costs:

  • If voluntarily reversing a benefit denial, obtain a release of attorneys’ fees in exchange for agreeing to grant the benefit.
  • Emphasize that fees are unwarranted or should be reduced substantially to reflect any unsuccessful claims.  Note that some courts, however, are unwilling to reduce fee awards for unsuccessful claims.  See e.g. Tarasovsky v. Stratify, Inc. Group Short Term Disability Plan, et al., 2013 U.S. Dist. LEXIS 70651 (N.D. Cal. May 17, 2013).
  • Vigorously defend against allegations of bad faith, because it is often considered as a factor in determining whether eligible parties are entitled to fees.
  • When amending plan language, state the reasons for the change, so that a participant can’t argue that the plan was amended as a result of a lawsuit.