ERISA Newsletter (July 2017)

EDITOR'S OVERVIEW

Welcome once again to Proskauer's newly revamped ERISA Newsletter. As a reminder, readers can obtain the information in this Newsletter as it is published on our blog.

Our featured article this quarter reviews an interesting circuit split on whether a board of trustees of a Taft-Hartley plan (multiemployer plan) should be considered structurally conflicted when a court reviews its decision to deny a benefit claim or appeal. After reviewing the circuit case law and the rationales behind the decisions, the authors discuss the practical implications for funds operating under the more burdensome rule.

The balance of the Newsletter reviews a number of developments, including updates on the DOL fiduciary rule, the Supreme Court's church plan decision, fee litigation, employer stock fund litigation, retiree benefits, mental health parity, benefit claims, IRS determination letter program, preemption, standing and health care reform.

ARE TAFT-HARTLEY BOARDS CONFLICTED WHEN REVIEWING ERISA BENEFITS DETERMINATIONS? CIRCUIT COURTS ARE SPLIT.*

By Myron Rumeld and Benjamin Saper

Although it has been nearly three decades since the Supreme Court first explained the appropriate standard of review for ERISA benefit claims, there remain unsettled issues that may affect the level of scrutiny that is accorded an administrative determination and, ultimately, the outcome of a claim for benefits. One such issue is whether benefit determinations made by the boards of trustees of Taft-Hartley plans—i.e., multiemployer plans that operate pursuant to the terms of collective bargaining agreements—should be more closely scrutinized by district courts because the boards are considered "structurally conflicted."

On the one hand, Section 302 of the Labor Management Relations Act requires that one-half of the board of a Taft-Hartley plan consist of trustees who are appointed by the employers who fund the plan, and, as such, are arguably motivated to deny the claim for the sake of saving costs. But on the other hand, the other half of the board consists of union-designated trustees who are arguably motivated to grant the claim to help their members. Moreover, the funding requirements for the plan are ordinarily pre-determined by collective bargaining agreements, such that benefit claims determinations do not directly impact employer funding obligations.

A circuit split on the issue has developed, with the Ninth, Sixth, and Fourth Circuits ruling that the boards of trustees of Taft-Hartley plans are not structurally conflicted and the Second Circuit ruling that they are structurally conflicted. This article reviews the underpinnings for the conflict of interest analysis generally and the reasoning of the differing rulings applying this analysis to Taft-Hartley plans. The article then discusses the practical implications for funds operating under the more burdensome Second Circuit rule, including the risk of undergoing additional discovery into the conflict issue, as well as the increased likelihood of an adverse outcome in the case.

Background

Before commencing a claim for benefits under Section 502(a)(1)(B) of ERISA, a plan participant or beneficiary must exhaust his or her administrative claims pursuant to a plan's internal procedures. See, e.g., Kennedy v. Plan Adm'r for DuPont Sav. & Inv. Plan, 555 U.S. 285, 300 (2009). Judicial review of benefit claim denials is de novo unless the plan confers discretionary authority on the administrator to determine eligibility for benefits or to construe the terms of the plan. Where such discretion exists, courts review denials of benefits under an abuse of discretion standard. See Firestone Tire & Rubber Co. v. Burch, 489 U.S. 101 (1989).For many years, courts struggled in deciding what impact, if any, a plan administrator's conflict of interest should have on the appropriate standard of review. For example, if the plan administrator worked for the company that was responsible for paying benefits, should the plan administrator's decision still be entitled to an abuse of discretion review, or should a less deferential standard of review be applied? In Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008), the Supreme Court answered those questions and held that a structural conflict is a factor for courts to weigh in determining whether an insurance company abused its discretion in denying a claim for benefits, but does not change the standard of review. Furthermore, the Court stated that the extent to which the structural conflict will impact a court's review will be influenced by such factors as the steps taken to reduce bias in claims determinations, compensation paid to claims decision makers, and a history of biased claims decision making.

Glenn ruled that the existence of a structural conflict "is clear where it is the employer that both funds the plan and evaluates the claims [because] every dollar provided in benefits is a dollar spent by the employer; and every dollar saved is a dollar in the employer's pocket." The Court also found that a structural conflict exists when an insurance company is responsible for paying benefits, as was the case in Glenn. The Court did not address, however, whether a structural conflict of interest exists where the claim decision maker is a board of trustees of a Taft-Hartley plan.

Taft-Hartley Plan Boards of Trustees: Conflict or No Conflict?

Since Glenn, courts have been divided on whether a board of trustees of a Taft-Hartley plan operates under a structural conflict of interest such that the conflict should be taken into account when reviewing its benefit claims decisions in a lawsuit. The Ninth, Fourth, and Sixth Circuit Courts of Appeals have concluded that boards of trustees of Taft-Hartley plans do not operate under a structural conflict of interest, while the Second Circuit has ruled directly to the contrary.

The Ninth Circuit was the first to address the issue after Glenn. In Anderson v. Suburban Teamsters of N. Illinois Pension Fund Bd. of Trustees, 588 F.3d 641 (9th Cir. 2009), the Court found that no conflict existed because the participating employers (not the trustees) fund the plan, the trustees have no personal economic interest in the decision to grant or deny benefits, and the board of trustees consists of both employer and employee representatives who determine employee eligibility under the Plan. Having held that the trustees were not conflicted, the Court did not permit discovery outside of the administrative record and found that the trustees did not abuse their discretion in reducing the plaintiff's disability benefits.

A subsequent district court decision elaborated on Anderson's reasoning. In Leblanc v. Motion Picture Indus. Health Plan (C.D. Cal. Dec. 7, 2012), aff'd, 593 F. App'x 729 (9th Cir. 2015), the plaintiff argued that a structural conflict existed because both the contributing employers and the unions shared the same interest in keeping the plan's costs low, since dollars saved from plan funding obligations could be used to increase wages or other benefits. In rejecting this argument, the court explained that the resources of any plan will necessarily be finite, and thus that plan administrators always have a fiduciary obligation to insure the prudent management of plan assets, including when making benefit determinations. Having concluded that there was no structural conflict, the court confined its review to the administrative record and held that the board did not abuse its discretion in reaching its determination and that summary judgment in favor of the board was warranted.

The Sixth Circuit similarly rejected plaintiff's argument that a Taft-Hartley plan's structure created an inherent conflict because the trustees not only approved and denied claims, but also maintained responsibility for ensuring that the plan remain properly funded. Klein v. Central States, Southeast and Southwest Areas Health and Welfare Plan, 346 Fed. App'x 1 (6th Cir. 2009). In so ruling, the Sixth Circuit explained that the board of trustees did not have a profit motive and individual trustees received no personal financial benefit from approving or denying claims. Having concluded there was no structural conflict, the Court reversed the lower court's finding that the plan's determination had been arbitrary and capricious and remanded to the district court for entry of judgment in favor of the plan.

The Fourth Circuit reached a similar conclusion in Parsons v. Power Mountain Coal Co., 604 F.3d 177 (4th Cir. 2010). It explained that "[t]he conflict of interest Glenn envisioned was one in which the plan administrator had a direct financial stake in eligibility determinations." By contrast, it found, the board of trustees of a Taft-Hartley plan does not suffer any economic hardship when the trustees award additional benefits because the plan is funded by multiple employers whose contribution obligations are prescribed by the collective bargaining agreement and are thus unimpacted by the amount of benefits awarded. Having found that the trustees were not conflicted, the Fourth Circuit affirmed the district court's summary judgment decision enforcing the trustees' decision.

Against this backdrop, the Second Circuit reached a different conclusion in Durakovic v. Bldg. Serv. 32 BJ Pension Fund, 609 F.3d 133 (2d Cir. 2010). The Court held that a board of trustees of a Taft-Hartley plan is conflicted within the meaning of Glenn because the evaluation of claims is "entrusted (at least in part) to representatives of the entities that ultimately pay the claims allowed." According to the Court, "[t]hat the board is...evenly balanced between union and employer does not negate the conflict." Having concluded that a conflict existed, the Court next determined that the trustees' decision to deny benefits was arbitrary and capricious, reversed the district court's ruling, and granted summary judgment in favor of the Durakovic. The...