Supreme Court decisions about ERISA cases, while infrequent, typically contain some surprises, as demonstrated most recently in CIGNA Corp. v. Amara.
In 1997, CIGNA notified employees that it was freezing accruals under its traditional defined benefit plan, and converting the plan into a cash balance plan. A cash balance plan is a "hybrid" defined benefit plan with features similar to a defined contribution plan. The method for determining accruals under the cash balance plan is different from the method under the traditional defined benefit plan, and in many cases takes into consideration the benefits already accrued under the traditional defined benefit plan. Ms. Amara and other participants filed a class action suit in the Second Circuit, raising numerous allegations regarding this conversion.
The District Court found that CIGNA was both the plan sponsor and plan administrator, and that its communications about the cash balance were incomplete, inaccurate, and intentionally misleading, causing a violation of the summary plan description requirements of ERISA Sections 102(a) and 104(b). For example, the Court found that summaries provided in 1998 did not describe "wear-away," a period during which some participants with significant traditional defined benefit accruals earned no new accruals under the cash balance plan, and suggested that wear-away would not occur. There is no explicit statutory penalty for violation of these ERISA sections, and the District Court ruled that ERISA Section 502(a)(1)(B) (benefits under the plan terms) allowed for reformation of plan terms in a manner consistent with the summaries, with benefits to be provided in accordance with those reformed terms. The District Court also held that the burden of proof the plaintiffs were required to meet to obtain this reformation was "likely harm", which allows for a presumption of prejudice if a plan participant can show they were likely to have been harmed as a result of the inconsistencies. The burden of proof then shifts to the employer to rebut the presumption of prejudice with evidence that the inconsistency was only a harmless error. The Second Circuit affirmed these decisions.
CIGNA argued that the employees should be held to a detrimental reliance standard, which would require each plaintiff to show that he or she read the summaries and that but for their reliance on the terms in those documents, they would have acted differently. The Supreme Court agreed to decide whether the District Court applied the correct legal standard for this 502(a)(1)(B) relief.
But the Supreme Court did not get to this issue, because it held that ERISA Section 502(a)(1)(B) does not authorize reformation. In the opinion written by Justice Breyer, the Court reminds us of the significant distinction between the plan sponsor function of establishing plan terms, and the plan administrator function of communicating to participants through the summary plan description and other materials. Rejecting the U.S. Department of Justice's position, the Court saw no reason to mix responsibilities by giving the plan administrator the power to set plan terms indirectly by including them in summaries, even if the plan sponsor and plan administrator were the same entity. The Court vacated the rulings, holding that summary documents about the plan do not constitute the terms of the plan, and that Section 502(a)(1)(B) does not authorize reformation of the plan document as written. These are significant rulings for employers, but not necessarily surprising ones.
The surprise is that the opinion did not stop with this holding. Instead, the Supreme Court remanded the case to the District Court for consideration of appropriate equitable relief under 502(a)(3), and traveled back in time several hundred years to analyze remedies that were typically available in equity prior to the merger of law and equity courts. This journey was to provide "principles that the court might apply on remand" because the District Court "strongly implied, but did not directly hold," that it would alternatively base its relief on this provision.
First, the Supreme Court stated that the power to reform contracts is a traditional power of an equity court, suggesting that 502(a)(3) might allow reformation of a plan for fraudulent suppressions, omissions or insertions. But as Justice Scalia, joined by Judge Thomas, points out in his opinion (concurring only as to the judgment) regarding the status of the summary plan description, reformation in this particular context does not square with the Court's analysis of the distinct roles of the plan sponsor and plan administrator.
Next, the Court stated that equitable estoppel based upon detrimental reliance was a traditional equitable remedy, which "operations to place the person entitled to its benefit in the same position he would have been in had the representation been true."
Finally, the Court stated that equity courts possessed the power to provide relief in the form of monetary compensation (a "surcharge") for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment. The Court decided that CIGNA is "analogous to a trustee" and settled on surcharge as its preferred remedy for a violation of summary plan description requirements.
Then the Supreme Court considered the "likely harm" standard, in the context of a 502(a)(3) breach of duty surcharge. The District Court had found (in the context of 501(a)(1)(B)): i) that the evidence presented had raised a presumption of likely harm suffered by members of the class; ii) that CIGNA, though free to offer contrary evidence in respect to some or all employees, had failed to rebut that presumption; and iii) the unrebutted showing was sufficient to warrant class-applicable relief.
The Supreme Court stated that under 502(a)(3), a fiduciary could be surcharged for breach of fiduciary duty upon a showing of actual harm, proven by a preponderance of the evidence, and causation. The Court then speculated about this case, without discussing case law on these 502(a)(3) issues, without distinguishing this Section 502(a)(3) breach of fiduciary duty claim from a Section 502(a)(2) breach of fiduciary duty claim, without defining the harm or the equitable relief, and without discussing how this actual harm and causation could be established in a class action.
Considerable dispute about Section 502(a)(3) has arisen since the Supreme Court's decisions in Mertens v. Hewitt Associates, Great-West Life & Annuity Ins. Co. v. Knudson, and Sereboff v. Mid Atlantic Medical Services, Inc., and conflicting opinions have been issued by various courts. Given that 502(a)(3) issues were not raised or briefed in this case, we believe Justice Scalia is correct in questioning why the Court engaged in this dicta, not binding upon the courts. Nevertheless, this case serves as a reminder to plan administrators that the requirement for a comprehensive summary plan description is a contradiction in terms with potential exposure.