In baseball, there is a common saying that a “tie goes to the runner.” Under this maxim, if a base runner and the baseball arrive at the base at the same time, the runner is safe. Stated another way, the baseball must arrive at the base before the runner in order for the runner to be out. The rule, essentially, construes close calls against the defense. Yet, many Major League Baseball umpires interpret the rule in the exact opposite manner, claiming that the runner must touch the base before the ball arrives in order to be safe. In other words, these umpires construe close calls against the offense.
If you were a baseball team worried about how close calls would get resolved, what would you do? One option would be to hope that the calls work out in your favor. Hope is not a plan, however, and so the better option would be to clarify how the rule will be interpreted before the game starts. That way, you know whether the umpire will show deference either to the offense or defense.
A recent Sixth Circuit case illustrates how ERISA plan sponsors can follow a similar strategy to help manage claims and litigation arising from their employee benefit plans. Clemons v. Norton Healthcare Inc. Ret. Plan, No. 16-5063, 2018 WL 2142640 (6th Cir. 2018).
Anyone who has had the experience of reading (let alone drafting!) an ERISA plan document understands the importance of clarity and precision when it comes to defining key terms such as eligibility for benefits, vesting, and the formula for calculating benefits. Yet, unforeseen questions will inevitably arise. Many ERISA plans handle this issue by specifically providing that the plan administrator has the authority to interpret plan terms and resolve any ambiguities. In other words, a “tie” goes to the plan administrator. The United States Supreme Court has held that when a plan contains this language, courts must show deference to the administrators and review their decisions under an arbitrary and capricious standard. In essence, even if a court would have ruled differently, so long as there were no clear conflicts of interest and the administrator did not act in an arbitrary manner, the court should uphold the administrator’s decision. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). That is a more favorable standard than the more common de novo standard of review.
Some claimants had found an interesting strategy to attack the Firestone defense. A common canon of contract interpretation–contra proferentum–states that any ambiguities should be interpreted against the drafter of the contract. When applied to ERISA plans, that would mean that a plan administrator would be required to construe ambiguities against the employer and in favor of the participant. If you sponsor an ERISA plan, you can see the potential collision course. If there is an ambiguous plan term, does a court resolve the ambiguity in favor of the plan administrator under the Firestone doctrine, or does it resolve the dispute in favor of the claimant under contra proferentum?
That was the dilemma the Sixth Circuit had to resolve. In Norton Healthcare, the main question centered on how to calculate lump sum pension benefits under Norton Healthcare Inc.’s pension plan. A class of retirees claimed that their benefits had been calculated incorrectly and that they were owed greater benefits under the plan. The District Court applied the doctrine of contra proferentum to rule in favor of the plaintiffs with respect to the proposed formula for calculating benefits. The Sixth Circuit, taking care to note that its own precedent was not entirely clear, reversed and remanded the decision. In particular, the Sixth Circuit held that because the plan at issue had the appropriate Firestone language, the plan administrator should be given deference to interpret the plan. It added that contra proferentum is “inherently incompatible with Firestone defense.” Further, when Firestone applies, a court may not invoke contra proferentum to “temper” the arbitrary and capricious review.
The case provides good news for plan sponsors, and it also provides an important reminder to plan sponsors to make sure that their own plans have the appropriate Firestone language and up-to-date claims procedures. Providing discretion to interpret plan terms and resolve ambiguities goes hand in hand with providing appropriate claims procedures (and following those procedures). Providing discretion in the plan document and following ERISA-compliant claims procedures will help employers manage claims and litigation arising out of their benefit plans. Accordingly, plan sponsors should take the following steps as a result of this litigation.
- Inventory all plans, including qualified, nonqualified, health and welfare, and severance plans, that are subject to ERISA.
- Review these plans to make sure that they have language that provides the plan administrator with authority to interpret the plans and resolve ambiguities, consistent with Firestone.
- Ensure that these plans have appropriate claims procedures. If the plans provide benefits upon a determination of disability, make sure that the plans comply with the most recent claims procedure regulations from the DOL.
- Document compliance with the claims procedures and take steps to avoid conflicts of interest in order to help ensure a favorable arbitrary and capricious standard of review rather than a de novo standard of review.
By having Firestone language in their plan documents and appropriate claims procedures, sponsors of ERISA plans will be able to streamline and manage the time and cost of claims and litigation under those plans.