ERISA’s attorney’s fee provision gives courts discretion to allow plaintiffs or defendants in ERISA litigation to recover “a reasonable attorney’s fee” from the opposing party. Unlike other attorney’s fee provisions, the language of ERISA’s fee-shifting provision does not require a party recovering its attorney’s fees to completely prevail in the litigation. Accordingly, in 2010, the United States Supreme Court held that an ERISA plaintiff or defendant could recover its attorney’s fees under ERISA if it could show “some degree of success on the merits” in the litigation, even if it did not completely prevail on all of its claims. But the Supreme Court did not define “some degree of success on the merits.” A recent decision issued by the U.S. Second Circuit Court of Appeals, Scarangella v. Group Health, Inc., 731 F.3d 146 (2d Cir. 2013), picks up where the Supreme Court left off. Scarangella broadly defines “some degree of success on the merits” so that in some circumstances, a party may be able to recover its attorney’s fees even if it settles an ERISA claim instead of litigating to a final judgment. Scarangella’s approach to awarding attorney’s fees under ERISA could substantially affect how insurers and administrators approach ERISA litigation.

Alleging wrongful denial of benefits under ERISA, the plaintiff in Scarangella sued his employer and the plan’s insurer. The insurer and the employer filed cross-claims and later moved for summary judgment against each other. In a detailed ruling, the court dismissed one of the insurer’s three cross-claims. It also explained that the insurer’s remaining two claims against the employer were “dubious” at best under ERISA, but begrudgingly allowed them to survive summary judgment. The court’s ruling spurred a settlement between the insurer and the plaintiff, and the insurer voluntarily dismissed its remaining claims against the employer.

Having been dismissed from the lawsuit without incurring liability, the employer sought attorney’s fees from the insurer. The court denied the request because two of the insurer’s three claims had officially survived summary judgment. On appeal, the Second Circuit reversed, holding that the employer had obtained “some degree of success on the merits” when the court dismissed one of the insurer’s claims, even though the insurer’s other claims remained. The Court thus remanded the case to the trial court to determine an appropriate fee award.

Scarangella’s broad conception of the “some degree of success on the merits” standard is sure to disappoint many administrators and insurers, each of whom might prefer the narrow approach advocated by the insurer, which was that attorney’s fees should be available under ERISA only if a party obtains a final judgment or a favorable court-ordered consent decree.

Scarangella expressly rejects this approach. Instead, Scarangella suggests that a party seeking its attorney’s fees obtains “some degree of success on the merits” when its adversary simply “gives up” on its claims or defenses. Scarangella does, however, indicate that some sort of judicial decision must influence the party’s surrender. Here, the trial court’s scathing summary judgment order — in which the court dismissed one of the insurer’s claims and expressed deep skepticism about the two surviving claims — made the insurer realize it was never going to prevail. What Scarangella leaves unclear, however, is whether the judicial decision must dismiss at least one claim or defense before it constitutes “some degree of success on the merits.”

Scarangella may be a bellwether for ERISA defendants. Historically, ERISA defendants benefited from the ability to make a difficult benefits decision, re-evaluate the decision during litigation, and eventually settle the claim without having to pay attorney’s fees. That approach is much riskier under Scarangella because the settling defendant may be liable for attorney’s fees if the settlement occurs after some judicial action, even if the action does not mean complete defeat for the defendant. Practically speaking, Scarangella cautions defendants to evaluate disputed benefits claims quicker, and when their evaluations suggest the claimant will succeed, to settle litigation before the court officially opines on anything. Also, when negotiating settlement agreements, settling defendants would continue to be wise to seek a waiver of the other party’s right to seek its attorney’s fees under ERISA, something the insurer in Scarangella is no doubt wishing it had done.

For now, Scarangella applies only in the Second Circuit and is not controlling in other federal jurisdictions (including Ohio), where parties remain free to advocate for a higher, narrower standard. But the Second Circuit — the federal appellate court sitting over New York’s federal court — is highly influential in ERISA cases and its persuasive clout could lead other federal courts to follow Scarangella.