The Ninth Circuit Court of Appeals on September 29, 2008 issued an opinion of importance to ERISA health plans, employers, and beneficiaries. In Vaught v Scottsdale Healthcare Corp. Health Plan, Inc., --- F.3d --- , 2008 WL 4380616 (9th Cir., September 29, 2008), the court held that an ERISA claimant need not raise at the administrative appeal level all grounds for appeal of a plan’s denial of benefits, but may properly raise new grounds for the first time in the district court. Ninth Circuit judges Sandra S. Ikuta and W. Fletcher reached this conclusion, over the vigorous dissent of Judge Carlos T. Bea, based on the majority’s analysis of the doctrine of exhaustion of administrative remedies. This Client Alert will briefly state the facts of the case and then summarize the court’s opinion.

Plaintiff Raymond Vaught crashed his motorcycle into a stopped vehicle and sustained serious injuries. Vaught’s blood alcohol content at the time of the collision was 0.261 per cent--more than three times Arizona’s legal limit. Vaught’s ERISA health plan expressly excluded coverage for medical expenses “relating to…[d]riving under the influence of alcohol or drugs” (the “DUI Exclusion”). On the basis of the DUI Exclusion, the plan denied Vaught’s claim for benefits. Vaught appealed to the plan’s claims administrator. The plan’s internal review procedures required Vaught to state in his written appeal “the reason” the claim should be reconsidered. Vaught’s first written appeal identified seven alleged procedural errors by the plan but did not take issue with the substance of the denial of benefits. Vaught obtained new counsel, was granted an extension of time by the plan, and submitted a second appeal. Once again, Vaught identified alleged procedural errors by the plan but failed to raise any substantive issue about the denial of benefits. The plan administrator denied Vaught’s appeal based on the DUI Exclusion.

Vaught sued his ERISA plan in United States District Court to recover the denied benefits based on a new theory not raised during the administrative appeal to the plan administrator. Vaught asserted in the district court that his injuries had been caused by the collision itself, not by alcohol. The district court concluded that by failing to raise the new theory in his administrative appeal, Vaught had failed to exhaust his administrative remedies, and the court on this basis granted the plan’s motion for summary judgment and dismissed Vaught’s ERISA claim.

The Ninth Circuit reversed and remanded based on its interpretation of the doctrine of exhaustion of administrative remedies. In ERISA and similar administrative cases a prospective plaintiff must generally exhaust administrative remedies as a prerequisite to filing suit in court. The Ninth Circuit’s opinion in Vaught goes further and draws a distinction between “remedy exhaustion” and “issue exhaustion.” Remedy exhaustion requires that the beneficiary receive a negative determination by the plan after administrative appeal. Vaught clearly did this. Issue exhaustion, in contrast, requires that a claimant raise at the administrative appeal all issues and substantive theories that the beneficiary may later raise in the district court. By raising a new substantive theory in the district court, Vaught failed the issue exhaustion test.

The Ninth Circuit held that ERISA appeals to the district court require remedy exhaustion, not issue exhaustion. The majority reasoned that an issue exhaustion requirement is appropriate where mandated by statute or regulation, or where the appeal process is adversarial. Because there is no statutory or regulatory requirement of issue exhaustion under ERISA and because ERISA administrative appeals are inquisitorial rather than adversarial, the court declined to require issue exhaustion in this context.

In dissent, Judge Bea takes strong exception with the majority’s reasoning:

The majority reads the policy as requiring only that a claimant give the Administrator any old reason he thinks benefits should not have been denied, whether or not later abandoned. The majority transforms the Plan’s requirement that Vaught state “the reason” he is challenging the denial of coverage into a requirement that can be satisfied if he states “a reason” or “any reason” for his challenge.

Whatever the merits of the dissent, it is now the law in the Ninth Circuit that an ERISA claimant need not raise at the administrative appeal level all grounds for appeal of a plan’s denial of benefits, but may properly raise new grounds for the first time in the district court. ERISA plans, beneficiaries, and employers should take note.