Benefits of the Doubt

When Liberty Mutual Insurance Group acquired the bankrupt Golden Eagle Insurance Corp. in 1997, it promised Golden Eagle employees that their tenure there would be credited to the company's pension plan. Liberty made clear that the employees' service time would count for eligibility, participation, vesting, early retirement, and spouse's death benefits - but it didn't state whether prior years counted for calculating accrual of benefits under the plan.

Concerned about their post-retirement income, Geoffrey Moyle and three other Golden Eagle employees embarked on eight years of litigation against Liberty, alleging breach of fiduciary duty and regulatory violations under the Employee Retirement Income Security Act (ERISA). The 1974 law covers most private sector employee benefit plans, and sets minimum standards to guarantee that plans are maintained in a fair and financially sound manner.

In July, U.S. District Judge Gonzalo P. Curiel of Los Angeles granted the insurer's motion for summary judgment, finding that Liberty's interpretation of the plan language was reasonable under ERISA section 502(a)(1)(B). Judge Curiel also rejected a separate claim for equitable relief under section 502(a)(3) - referring to that provision as a "catch-all" for use only if other ERISA remedies are not available. (Moyle v. Liberty Mut. Ret. Benefit Plan, 2013 WL 3316898 (S.D. Cal.).)

Still hoping to turn dross into benefits for their golden years, however, the plaintiffs have taken their case to the Ninth U.S. Circuit Court of Appeals. At stake is whether the employees may recover "appropriate equitable relief" under ERISA for breach of trust. If the circuit's recent history in such cases is a guide, they may have come to the right place for help.

In three significant recent opinions, the Ninth Circuit has denied an insurers' ability to recoup disability overpayments by walling off Social Security reimbursements; curtailed a fiduciary's attorney-client privilege protections; and limited an important defense in stock-drop cases by rejecting the "presumption of prudence" in some investments by the fiduciary. The rulings have eaten away at standards deferential to plan administrators, to the benefit of pensioners and disabled workers.

The Ninth Circuit's willingness to expand the rights of plan participants - even if contrary to opinions in other circuits - cuts across an array of specialties and makes it an attractive venue for plaintiffs. By late last year, nearly 70 ERISA-related appeals were pending before the court, with potential implications for pension rights, disability coverage, and health insurance.

In June 2012 a Ninth Circuit panel broke with five other circuits to prevent insurers from skirting rules banning attachment of Social Security benefits as a means to recover overpayment of long-term disability benefits.

In 2004 Leah Bilyeu filed a claim with First Unum Life Insurance Co. under her employer's Morgan Stanley Long Term Disability Plan. The insurer approved the claim for 24 months of benefits, subject to its mental illness limitation. Bilyeu then filed suit, alleging that Unum wrongfully terminated benefits because her disability was caused by an autoimmune condition, not mental illness. The insurer brought a counterclaim, demanding that Bilyeu reimburse it for overpayment arising from $36,000 in disability benefits she had received from Social Security.

Vacating a trial court judgment favoring Unum, the Ninth Circuit ruled that under ERISA, Unum could seek only equitable relief and not claim breach of contract. Despite Bilyeu's contractual obligations under the plan, Unum could not secure reimbursement by attaching her Social Security benefits as "an equitable lien by agreement," or by showing that sufficient funds were still in her possession. (Bilyeu v. Morgan Stanley, 683 F.3d 1083 (9th Cir. 2012).)

"By identifying the overpaid benefits as the particular fund, rather than as the Social Security benefits, Unum attempts to circumvent the congressional prohibition on assignment and attachment of Social Security benefits," Judge Raymond Fisher wrote, noting that he was "unpersuaded by the view" of the First, Third, Fifth, Sixth, and Seventh circuits to the contrary.

Respondent Morgan Stanley petitioned for certiorari to the U.S. Supreme Court, which let the opinion stand. In April, however, the high court remanded a Third Circuit decision on the treatment of claims for reimbursement from a third party - though the funds were not from Social Security. (U.S. Airways Inc. v. McCutchen, 663 F.3d 671 (3rd Cir. 2011) vacated 133 S. Ct. 1537 (2013).)

The Bilyeu decision is a blow to plan insurers that routinely award benefits before Social Security resolves a disability claim. "To me, Bilyeu is one of the most troubling [circuit] decisions, because the court didn't allow enforcement of a reimbursement agreement," says Sean P. Nalty, who specializes in ERISA benefit litigation at Ogletree, Deakins, Nash, Smoak & Stewart in San Francisco.

"There are a lot of disability plans that, in various ways, try to incorporate a Social Security offset, to reduce the disability benefit," says Peter K. Stris of Stris & Maher in Los Angeles. "But Social Security has an anti-alienation rule, so plans try to find creative ways" to recoup payments.

Another Ninth Circuit panel addressed attorney-client communications between policyholders and insurance companies that serve as ERISA fiduciaries and plan sponsors. Plaintiff Mark Stephan suffered a catastrophic spinal cord injury in a 2007 bicycling accident just three months after joining San Francisco's Thomas Weisel Partners as a managing director. Though Stephan was covered by the company's long-term disability plan, Unum Life Insurance Co. refused to calculate benefits based on a combination of his $200,000 base salary and a guaranteed first-year $300,000 bonus.

Stephan filed suit in 2008, alleging abuse of discretion under ERISA. During discovery Stephan's lawyer sought a series of internal memos between Unum's in-house counsel and a claims analyst that might demonstrate whether Unum operated under a conflict of interest as both the claims administrator and the source of payments.

Unum argued that the attorney-client privilege should apply, since the memos were written after Stephan's lawyer contacted the company. The district court granted the insurer's motion for summary judgment, ruling that "Unum's conflict of interest did not weigh heavily upon its decision-making process," and more generally, that it had not abused its discretion in excluding the bonus from benefit calculations.

On appeal, however, the Ninth Circuit ruled in September 2012 that the memos were discoverable under the fiduciary exception to the attorney-client privilege. "Advice on the amount of benefits Stephan was owed under the plan, given before Unum had made any final determination of his claim, constitutes advice on plan administration," Judge Marsha S. Berzon wrote for a 2-1 panel majority. "Such advice was given before the interests of Stephan and Unum became adverse." (Stephan v. Unum Life Ins. Co. of Amer., 697 F.3d 917, 933 (9th Cir. 2012).)

In her ruling, Judge Berzon pointed out, "There is no binding precedent in this circuit delineating precisely when interests of a plan fiduciary and its beneficiary become sufficiently adverse that the fiduciary exception no longer applies." Four months after the opinion issued, the parties entered a confidential settlement.

Mark D. DeBofsky, Stephan's lawyer and a partner at Chicago's DeBofsky & Associates, contends that as a result of the panel's ruling, "attorney communication during the benefit claim process is no longer shielded as privileged." Expect more fireworks, DeBofsky adds. "This is an evolving area of ERISA law."

In a third case, last June the Ninth Circuit removed a key defense used by fiduciaries accused of breaching the duty of care when they encourage participants in 401(k) plans to invest in company stock.

In 2007 Steve Harris and other employees of Amgen Inc., a global biotechnology firm, filed a class action following a drop in the company's stock - from $86 to $57 a share during the class period - in reaction to a regulatory announcement. The Food and Drug Administration had mandated a "black-box" warning to physicians for off-label use of Amgen's two leading anemia drugs. Despite studies showing increased risk of death in cancer patients who took the drugs when they were not receiving chemotherapy, Amgen had widely promoted off-label use of the two drugs.

The district court initially dismissed Harris's claims for lack of standing, but the Ninth Circuit reversed. (Harris v. Amgen, Inc., 573 F.3d 728 (9th Cir. 2009).) In 2010 Harris and four other plan participants filed an amended complaint, which the district court dismissed on the ground that Amgen was not a fiduciary. On appeal, however, the Ninth Circuit again reversed. (Harris v. Amgen, Inc., 2013 WL 5737307 (9th Cir.).)

Writing for a unanimous panel, Judge William A. Fletcher held that Amgen qualified as a plan fiduciary because it had not clearly delegated exclusive authority to an administrator. In addition, the panel found that Amgen was not entitled to a "presumption of prudence" for continuing to provide Amgen stock to plan participants as an investment alternative. (See Quan v. Computer Scis. Corp., 623 F.3d 870 (9th Cir. 2010).)

The court held that Amgen's investment committee had discretion over whether to halt purchase of employer stock. "We conclude that defendants were neither required nor encouraged by the terms of the plans to invest in Amgen stock, and that they are not entitled to a presumption of prudence," Fletcher wrote. In October, the full court rejected Amgen's request for en banc reconsideration.

In this instance, the Ninth Circuit's opinion was "in the mainstream," according to Mark C. Rifkin, Harris's attorney and a partner at Wolf Haldenstein Adler Freeman & Herz in New York.

The circuit's recent ERISA rulings - and a 2011 U.S. Supreme Court opinion - may bode well for the pending breach-of-trust appeal by Geoffrey Moyle and his Liberty Mutual colleagues.

Two years ago the Supreme Court held that under ERISA section 502(a)(1)(B), judges may not reform benefit plans to match the more favorable terms presented in summary plan descriptions if they are inconsistent with terms in the official plan document. But the Court majority surprised ERISA practitioners by also declaring - contrary to the long-accepted interpretation of precedent - that claimants may recover equitable damages as a "surcharge" under section 502(a)(3) to redress ERISA violations. In dissent, Justice Antonin Scalia harrumphed that the Court's discussion of equitable relief "is purely dicta, binding upon neither us nor the District Court." (CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1884 (2011).)

Last year, however, a Ninth Circuit panel balked at extending equitable relief under ERISA. Delaying oral argument until after the Supreme Court had ruled in Amara, a unanimous panel affirmed dismissal of a complaint brought by two Litton Industries employees who alleged that ambiguity in plan documents created a triable issue. Judge Alfred T. Goodwin wrote that before a court can impose an equitable surcharge under ERISA, the fiduciary must either breach a duty to enforce the terms of the plan, or gain some benefit by failing to ensure that participants receive an accurate plan description. (Skinner v. Northrop Grumman Ret. Plan B, 673 F.3d 1162, 1167 (9th Cir. 2012).)

Moyle's attorney, Matthew B. Butler of Butler Myers in San Diego, remains upbeat about his chances on appeal. "In the post-Amara context, the Ninth Circuit still has not addressed whether there is adequate relief," he says. If material facts are omitted in describing a benefit, Butler argues, and section 502(a)(1)(B) provides no remedy to change the plan, then equitable relief under section 502(a)(3) may be plan participants' only hope.

Moyle's appeal could test how far the Ninth Circuit is willing to stretch such a claim under the Amara framework. "Our case falls within [the issues] Amara teed up," Butler says.

Pamela A. MacLean is a contributing writer for California Lawyer.

---