In Conkright v. Frommert, decided on April 21, 2010, the Supreme Court held that deference must be given to a plan administrator’s interpretation of plan terms, even after the plan administrator’s “first try” at interpreting that language of the plan is found to be an abuse of its discretion. Five justices of the Court (in a 5-3 opinion with Justice Sotomayor taking no part) held that under these circumstances, Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), compels the application of a deferential standard of review so long as the plan administrator is not found to have acted in bad faith or dishonestly in making either the first or subsequent interpretations.

In this Client Alert, attorneys from our ERISA Litigation Practice summarize the case and identify important ramifications of the Court’s decision.

Background

Plaintiffs were a group of Xerox employees who left the company in the 1980s, received lumpsum distributions of retirement benefits, and then returned to Xerox as employees. Plaintiffs dispute the Xerox plan administrator’s interpretation of the plan to account for plaintiffs’ past distributions when calculating plaintiffs’ current benefits. Plaintiffs administratively challenged this interpretation unsuccessfully, and then filed suit in District Court. The District Court granted summary judgment for the plan, applying a deferential standard of review. On appeal, the Second Circuit reversed, finding that the plan administrator’s interpretation was unreasonable.

On remand, the plan administrator proposed a new interpretation of the plan. However, the District Court, not applying a deferential standard of review, rejected the new interpretation, and adopted the plan interpretation advocated by plaintiffs. On appeal, the Second Circuit affirmed, holding that the District Court was not obligated to give deference to the plan administrator’s interpretation of a plan where a prior interpretation was found to be unreasonable.

Majority Opinion

The Supreme Court reversed the Second Circuit, rejecting the Second Circuit’s “one-strike-andyou’re- out approach,” and concluded that the Second Circuit improperly carved out an exception to the deferential review standard announced in Firestone. Writing for the majority, Chief Justice Roberts explained: “People make mistakes. Even administrators of ERISA plans. That should come as no surprise.” Thus, “a single honest mistake” does not justify stripping an administrator of the deference owed under Firestone.

The majority reached this conclusion by first consulting trust law. Although the majority used trust law as a guide, it held it was inconclusive and “does not tell the entire story.” The majority next considered ERISA’s underlying principles, first noting that Firestone deference promotes efficiency, predictability, and uniformity by avoiding “a patchwork of different interpretations of a plan” and promoting the administrative resolution of disputes rather than costly litigation. The Court refused to adopt the Second Circuit’s approach given the “prospect of increased litigation costs” and detriment to predictability and uniformity — a key part of ERISA’s statutory scheme — that would attend stripping plan administrators of deference after making an “honest mistake.” The majority also critiqued the District Court for adopting a plan interpretation that, in the actuarial world would be “heresy,” thus highlighting how ill-equipped courts are to interpret plan provisions. Finally, the majority stressed that there were no allegations that the plan administrator acted dishonestly or in bad faith in interpreting the plan.

Dissent

Justice Breyer, joined by Stevens and Ginsburg, dissented, concluding that trust law compelled the result arrived at by the Second Circuit. The dissent took issue with the majority for, in its view, misinterpreting applicable trust law, and developing a procedure by which courts will be required to analyze plan administrator’s motives in making plan interpretations.

The dissent also reached a question that the majority did not; it argued that the Second Circuit correctly applied abuse of discretion review to the District Court’s opinion interpreting the plan because the District Court was essentially acting as the plan administrator.

Ramifications

The Conkright decision reinforces the significant deference a plan administrator’s plan interpretation is due under Firestone. This is a very positive development for companies that maintain ERISA plans, because it promotes predictability and reduces litigation risk, and reinforces a plan administrator’s ability to say what its plan means. However, the opinion leaves open the question of whether, if the lower courts had found that the plan administrator was acting in bad faith or dishonestly, the Second Circuit and District Court would have been correct in stripping the plan administrator of its Firestone deference.