Editor’s Overview

This month, we feature two articles that discuss the accrual of statutes of limitations for ERISA claims, providing practical insight into reliance on the statutes to bar plaintiffs’ claims. The first article discusses the Seventh Circuit’s recent decision in Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., addressing the accrual of claims for benefits. The second article provides an overview of varying approaches among the Courts of Appeals regarding statutes of limitations applicable to breach of fiduciary duty claims.

As always, be sure to review the section on Rulings, Filings, and Settlements of Interest. The section includes a summary of a decision that will be discussed in depth in next month’s Newsletter: Bacon v. Stiefel Laboratories, Inc., 09-cv-21871-JLK, 2011 WL 2973677 (S.D. Fla. July 21, 2011), which denied certification of class claims alleging fraudulent misrepresentations in connection with the merger of an ESOP and 401(k) plan because individual reliance determinations would be required.  

Seventh Circuit Confirms that Receipt of Benefit Distribution Can Trigger Statute of Limitations; Also Precludes Deference to Plan Administrator Where No Discretion Exercised[1]

The Seventh Circuit recently addressed two significant issues in Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc.[2] First, the Court held that a lump sum benefit payment can trigger the statute of limitations. In so ruling, the Court clarified that its prior ruling in Young v. Verizon,[3] that the statute of limitations did not begin to run until the plaintiff’s formal claim for benefits was denied, was confined to the facts of that case. The Court also held that plan fiduciaries are entitled to no deference where they have exercised no discretion in interpreting the terms of the plan.

The statute of limitations ruling provides significant guidance on when a claim accrues, for statute of limitations purposes, which in turn depends on when a claim for benefits is deemed “repudiated.” The deference ruling indicates that there are limitations on when the administrative process can serve as a vehicle for limiting judicial scrutiny of plan determinations.

Background

In 1998, S.C. Johnson & Son amended its ERISA plan to convert it from a traditional defined benefit plan into a “cash balance” plan. Although cash balance plans are formally classified as defined benefit plans, they function more like defined contribution plans in that they provide an account balance for each participant. However, that account balance is only a notional tool for calculating a retirement annuity, not an actual account containing money. Defendants – two retirement plans of S.C. Johnson – conceded that the amended plan unlawfully calculated the lump sum benefits that were available to participants at termination, in lieu of a retirement annuity, in that the payment was based on an amount equal to the amount in the cash balance account, rather than adjusted to include the present value of future interest credits that participants would have earned if they did not take the lump sum.

Plaintiffs, plan participants who had received lump sum distributions, filed suit in 2007. The parties cross-moved for summary judgment. Defendants argued that the statute of limitations barred plaintiffs’ claims. The United States District Court for the Eastern District of Wisconsin held that Wisconsin’s six-year contract limitations period applied. For purposes of the statute of limitations analysis, the district court divided the class into two groups: participants who received their lump sums within the six year limitations period, and those who received their lump sums more than six years before the lawsuit was filed. The district court held that the claims accrued when the plaintiffs received their lump-sum distributions, thereby rendering the claims of the first group timely and the claims of the second group untimely.

The District Court then considered the recovery to which the plaintiffs in the first group were entitled. Relying on Conkright v. Frommert,[4] the District Court determined that the plan defendants were entitled to deference in choosing the appropriate method to calculate damages. The district court selected a modified version of the plan defendants’ proposed method.

Both parties appealed to the Seventh Circuit Court of Appeals on the issue of timeliness. The defendants argued that the district court was correct in ruling that the claims of plaintiffs in the second group were untimely because their lump sum distributions occurred over six years prior to the litigation; however, the defendants also argued that the claims of plaintiffs in the first group were untimely as well because all plan participants were informed of the relevant plan provisions in 1999, more than six years before suit was commenced. The plaintiffs argued that the court was correct to conclude that the first group had timely claims, but that the second group’s claims should not have been barred because the receipt of a lump sum distribution was not a “repudiation” triggering the start of the statute of limitations clock. The parties also appealed whether the plan defendants’ proposed method of recovery was entitled to deference and also presented for appeal the question of whether the district court or the parties should determine how future interest credits should be determined for purposes of the damages calculation.

The Seventh Circuit’s Ruling on the Statute of Limitations

The Seventh Circuit affirmed the district court’s rulings on the statute of limitations. The Court of Appeals explained that “[t]he general federal common law rule is that an ERISA claim accrues when the plaintiff knows or should know of conduct that interferes with the plaintiff’s ERISA rights” and explained further that “a claim to recover benefits under § 502(a) accrues upon a clear and unequivocal repudiation of rights under the pension plan which has been made known to the beneficiary.”[5] Although noting it was a “close question,” the Seventh Circuit rejected the defendants’ argument that the statute of limitations ran from the time the participants received Summary Plan Descriptions (SPDs) and informational materials describing the benefit formula.[6] The court held that, while the SPDs and other informational communications “touch[ed] on” the lump-sum distribution issue, these materials were “inadequate to convey the crucial defect in the Plans: that early lump sum distributions would not be increased to reflect the present value of future interest credits continuing to age 65.”[7] The court observed that while the SPDs told participants that they would cease to earn additional credits after receiving a lump sum, the SPDs failed to communicate that the lump sum benefit they would receive would not take into account the present value of these credits.[8]

Significantly, the court recognized that it is possible for generic plan communications to “prospectively repudiate unequivocally participant rights.”[9] However, the court explained that, in this case, because of the “relative obscurity of the rights at issue, the fact that most of the Plans’ references to lump-sum distributions offered only oblique guidance about the crucial flaw at issue . . . and the fact that the most illuminating statements were found in informal Plan newsletters as opposed to the more legally weighty SPDs,” there was no clear and unequivocal repudiation of the plaintiffs’ rights to future interest credits under ERISA.

The Seventh Circuit agreed with the district court that the claims of the second group were time-barred. It ruled that the receipt of the lump sum distribution constituted an “unequivocal repudiation of any entitlement to benefits beyond the account balance,” because information circulars previously distributed “confirmed that after a lump sum distribution, no additional benefits would be forthcoming.”[10] The court explained that the lump sum distributions served as the “final step” of a clear repudiation of the plaintiffs’ right to something more. In so ruling, the court rejected the plaintiffs’ argument that the lump-sum distributions did not start the statute of limitations clock because plaintiffs could not have understood their injury without seeing the full plan document. The court explained that to understand their injury, the plaintiffs needed to reference ERISA and the laws interpreting it, not the plan. The court noted that the fact that “[t]hose sources may be obscure,” should not to be held against the defendants.

In concluding that claim accrued from receipt of the lump-sum distribution, the court distinguished its prior ruling in Young v. Verizon,[11] where the Seventh Circuit had found that the payment of a disputed lump-sum amount did not qualify as a “clear repudiation.” The court explained that the “right that the lump-sum distribution needed to ‘clearly repudiate’ was very different in Young.” In that case, the fiduciaries had distributed benefits that were smaller than what the plan literally prescribed, due to a scrivener’s error. In these circumstances, the court concluded that the mere distribution of the lump sum would not have placed the participant on notice that one of the factors in the plan’s benefit formula was being ignored. In Thompson, by contrast, the court explained that, in order to place plaintiffs on notice of their claim, “the lump-sum distribution merely needed to show that participants would receive their account balance and no more.” The court also explained that Young was not controlling because the plaintiff had exhausted the plan’s internal remedies in that case, thereby furnishing an alternative accrual date (the date the plan finally denied her claim). In Thompson, the plaintiffs were “given a pass” on exhausting their claims and the court refused to allow the plaintiffs to “slip by with no accrual date.”

The Seventh Circuit’s Ruling on Deference Owed to Plan Administrator’s Calculation of Damages

The Seventh Circuit rejected the defendants’ argument that their methodology for calculating damages was entitled to deference under Conkright v. Frommert. In Conkright, the Supreme Court reiterated the policy set forth in Firestone Tire & Rubber Co. v. Bruch,[12] that courts are to defer to plan fiduciaries’ interpretation of plan terms and clarified that fiduciaries are not stripped of deference because of an initial improper interpretation.[13] The Seventh Circuit concluded that Conkright was not applicable because Firestone deference applied only to questions of plan interpretation and did not extend to design decisions. Because the fiduciaries did not exercise interpretive discretion over the projection rate for calculating future interest credits, the court concluded that Conkright and Firestone were inapplicable. The court thus reversed the district court ruling to the extent that it held that some deference was owed to the plan defendants’ damages calculations and remanded the case for the district court to determine damages without deference to the plan’s proposed methodology.

Proskauer’s Perspective

The Seventh Circuit’s decision in Thompson is significant because it recognizes that claims for benefits under ERISA can accrue, for statute of limitations purposes, well before a participant files a formal claim for benefits. While other courts have already recognized that the limitations period can run upon a “repudiation” of rights that occurs before a formal administrative claim is filed,[14] this ruling helps clarify that adequate notice can constitute a repudiation for these purposes. By narrowing and distinguishing the court’s prior ruling in Young v. Verizon, the decision confirms that a benefit distribution can start the statute of limitations clock running. The decision also recognizes that, in appropriate circumstances, plan communications can also commence the running of the limitations period. The court’s ruling and rationale thus may present opportunities for defendants to bar claims that are brought at the time a participant retires, but are based on events that took place many years earlier, as to which the evidence has become stale. At a minimum, the decision would oblige participants to bring their claims within a reasonable period after their benefit payments commence, thus preventing suits that are belatedly brought at the behest of plaintiffs’ attorneys based on newly discovered legal theories.

The deference ruling, on its face, would also appear to be potentially significant for ERISA litigators, in that it purports to carve out a category of cases in which the defendant-friendly arbitrary and capricious standard of review would not apply because the plan administrator exercised no discretion. We suspect, however, that there will be relatively few circumstances in which plan administrators will be found to have exercised no discretion at all in rendering benefit determinations.