In Scarangella v. Group Health, Inc., the U.S. Court of Appeals for the Second Circuit recently applied the Supreme Court’s decision in Hardt v. Reliance Std, Life Ins. Co., requiring a party to show that they achieved “some degree of success on the merits” before recovering attorney’s fees in an action under the Employee Retirement Income Security Act (ERISA) to a situation involving voluntary settlement between parties. The decision provides some additional guidance as to how courts may make the determination on whether or not they will award attorney’s fees in ERISA cases where there is no clear winner at the end of litigation.

The Supreme Court’s Decision in Hardt

The Supreme Court in Hardt resolved a split amongst the circuit courts of appeal as to the threshold legal standard governing a party’s eligibility for attorney’s fees under ERISA. In Hardt, the Court held that a party seeking attorney’s fees in an ERISA action need not demonstrate that it was a “prevailing party” in the lawsuit, and instead, need only show that it achieved “some degree of success on the merits” to be awarded fees. The Court explained that while this standard requires a party to demonstrate that he or she achieved something more than a “trivial success on the merits” or a “purely procedural victory,” courts did not need to conduct a lengthy inquiry into whether the party’s success was substantial or whether that success had occurred on a central issue.

The Second Circuit’s Holding in Scarangella

The Second Circuit in Scarangella applied this standard to a complex fact pattern, ultimately deciding that a decision rendered by a district court following a motion for summary judgment, which was in the nature of a Rule 12(b)(6) motion, was sufficient to constitute the achievement of more than “a purely procedural victory” so as to justify an award of attorney’s fees under ERISA. The court did not, however, actually award attorney’s fees, and instead, remanded the case back to the district court.

Factual and Procedural Background of Scarangella

The issue of attorney’s fees arose from cross-claims between defendants Village Fuel, the plan administrator, and Group Health Inc. Insurance Plan (GHI). The case originated from a claim for medical benefits by a Village Fuel employee for his wife. After determining that the employee and his wife were not covered under the plan, GHI denied reimbursement for the medical expenses and brought suit to retroactively rescind the insurance policy. In response, the employee filed an action against both GHI and Village Fuel under ERISA. GHI interposed cross-claims against Village Fuel, seeking rescission/reformation of its policy to exclude the employee from the plan and/or restitution for previously conferred benefits. In response, Village Fuel cross-claimed against GHI for restitution in the event that Village Fuel was required to pay any monies to the employee. Both GHI and Village Fuel filed cross-motions for summary judgment.

The district court dismissed both GHI’s and Village Fuel’s claims for restitution, holding that money damages were not equitable in nature and thus were not available under ERISA. The court, however, denied the cross-motions for summary judgment on the rescission and reformation claims, finding that there were material facts for trial.

Following the court’s decision on the cross-motions, GHI and the employee reached a settlement and the remaining claims were voluntarily dismissed with prejudice as against each other and as against Village Fuel. Subsequently, Village Fuel moved for attorney’s fees against GHI.

The attorney’s fees issue was decided by a magistrate judge, who found that Village Fuel had achieved some degree of success on the merits and recommended a partial award of attorney’s fees. However, the district court chose not to adopt the magistrate judge’s opinion and determined that Village Fuel was ineligible for attorney’s fees. The court ruled that the dismissal of GHI’s restitution claim did not amount to success on the merits because it was procedural in nature and the voluntary dismissal of the remaining claims did not qualify as litigation success.

A Decree Prompting an Out-of-Court Settlement Action May Create Entitlement to Fees

On appeal, the Second Circuit disagreed with the district court. The court reasoned that although the determination on the summary judgment motion was in the nature of a Rule 12(b)(6) motion, the dismissal of the restitution claim was not merely a procedural victory but a substantive one on the merits. The court also reasoned that a party could demonstrate that it had achieved some degree of success on the merits if a court decision was a catalyst for a voluntary discontinuance or settlement of a lawsuit.

The court further explained that a party who obtains relief due to the voluntary conduct of another party after minimal litigation is unlikely to succeed in seeking attorney’s fees. However, under this “catalyst theory,” if the parties received a “tentative analysis of their legal claims,” a party may recover attorney’s fees if it is able to show that the court’s discussion of the pending claims resulted in the obtained relief.

Lessons Learned

This case demonstrates the importance of performing a careful risk analysis at the beginning of an ERISA action to determine whether a settlement can be reached. To avoid the showing of “some degree of success on the merits,” parties may want to consider settling before the court has an opportunity to adjudicate on the case’s merits. In addition, all ERISA settlement agreements should contemplate resolving the attorney’s fees issue and, if possible, contain waivers for claims for attorney’s fees.