Court Rejects 'Equitable Remedies' in SPD Case
In some ways, the Ninth Circuit's recent decision in Skinner v. Northrop Grumman Retirement Plan B is a garden-variety example of a classic fact pattern: the terms of a summary plan description (SPD) promise better benefits than the plan document it summarizes, and participants sue for the difference. Skinner demands our attention, however, because it is the first decision by a federal court of appeals to interpret the Supreme Court's most recent high-profile decision on ERISA remedies: CIGNA Corp. v. Amara.
The Ninth Circuit held that the terms of the more generous SPD were not enforceable under any of the theories advanced by the plaintiffs. But to understand Skinner's significance, we must view it in context of the Supreme Court's prior decisions. That means it's time for a little ERISA 101.
Plaintiffs' Theories Proposed in CIGNA Corp. v. Amara
ERISA imposes myriad obligations on plan sponsors and fiduciaries, but it rarely specifies a remedy for violations of those obligations. When no remedy is specified, participants may (and always do) seek the "other equitable relief" authorized under Section 502(a)(3). In broad terms, "equitable" relief is any form of relief other than damages under a contract. In the ERISA context, it means any relief other than payment of a benefit under the terms of the plan. Because of the catch-all nature of this provision, the federal courts have long wrestled with the question of precisely what "other equitable relief" means.
The Supreme Court has generated an impressive line of bewildering cases on the subject. As human-resources and benefits professionals know, these cases have sought answers to cutting-edge questions about benefit plans in hair-splitting contests about the equitable remedies that were available before the federal courts of law and equity were merged in 1938 (or, as Justice Scalia likes to say, "in the days of the divided bench"). These were--literally--cases about bags of gold and oxen. To call these decisions "abstruse," "convoluted," "opaque," and "infuriating" would be both accurate and enjoyable, so let's do so.
As we reported in our August 2011 article, the Supreme Court's Amara decision foreclosed a favorite plaintiff's tactic when it held that the terms of a plan's SPD are not a part of the plan, and therefore cannot be enforced as if they were. This holding appeared to put to rest, once and for all, the long-standing debate among the federal courts as to whether the plan or the SPD should govern when the two documents differ and the terms of the SPD would provide a larger benefit.
Realizing at the last moment that they had almost blundered and created a bright-line rule, the Court hastened to speculate that other equitable remedies that it had previously suggested were not available might, in fact, be available after all. Hitting its stride, the Court went on to muse about whether plaintiffs in such hypothetical cases would have to prove causation, harm, and damages.
Specifically, the Court suggested that the following remedies might be available to participants under ERISA Section 502(a)(3) when the terms of an SPD describe more generous benefits than the terms of the plan:
- Estoppel (denying a plan sponsor the right to rely on the plan's terms when it has made contrary representations to participants about their benefits);
- Reformation (revising the plan's terms to conform to the terms of the defective SPD); and
- Surcharge (a form of monetary revenge against a trustee or other fiduciary for breaching its duty to the participant).
These are the three theories the Ninth Circuit considered -- and rejected -- in Skinner.
The Skinner Decision
The facts of the Skinner case can be summarized very simply: When the plaintiffs retired, the terms of their SPDs said they would receive larger benefits than the terms of the plan. After the plaintiffs received only the smaller benefits, they sued both the plan sponsor and the administrative committee (the Committee) that had prepared the SPD.
The plaintiffs argued that the court should enforce the terms of the SPD. In doing so, they initially relied on previous Ninth Circuit decisions holding that the SPD is a part of the plan and that it controls when the underlying plan document is less generous. Amara foreclosed this argument by expressly holding that the SPD is not a part of the plan and is therefore unenforceable.
The Skinner plaintiffs then did what plaintiffs all over the country will do: they recast their arguments to align with the new theories articulated in Amara. Because ERISA plans are similar to both trusts and contracts, the court's analysis of these arguments was complicated by the need to review each theory under the principles of both areas of law.
The plaintiffs in Skinner did not pursue the estoppel theory. To recover on the basis of estoppel, a plaintiff must demonstrate not only that the sponsor made conflicting representations about benefits, but also that he or she relied on the more favorable representations. The Skinner plaintiffs conceded that they had presented no evidence at trial that they had relied on the inaccurate SPDs.
The court first noted that the remedy of reformation is available only in cases of "mistake" and fraud. If a plan is viewed from the perspective of trust law, the "mistake" is a deviation from the plan sponsor's intent. Under contract law, "mistake" refers to a deviation from the mutual intent of both parties to a contract. The court rejected both theories because the plaintiffs provided no evidence that the plan failed to reflect the drafter's (or anyone else's) intent.
The court rejected the trust version of the fraud theory because the plaintiffs provided no evidence of fraud, duress, or undue influence in the preparation of the plan document. It rejected the contract version of this theory because there was no evidence that the Committee intended to deceive anyone. (In doing so, the court drew a sharp contrast to the facts in Amara, where the plan sponsor had intentionally misled its employees.)
3. Surcharge and the Critical Question of "Harm"
The most interesting part of the court's analysis--particularly for plan sponsors--came in response to the participants' assertion that the Committee had breached its fiduciary duty to the participants. Under this theory, a fiduciary is financially liable for breaching its duty to a participant only if the fiduciary is unjustly enriched, or the participant is harmed, by the breach.
The plaintiffs argued that there were actually two such breaches. The first was a breach of the Committee's supposed duty to enforce the more favorable terms of the SPD instead of the terms of the plan. The court rejected this argument out of hand. Citing the central holding of Amara, it held that the terms of the SPD itself were not enforceable under ERISA, and that in this context the Committee's fiduciary duty was, in fact, to enforce the terms of the plan.
The court gave more credence to the plaintiff's argument that the Committee had a statutory obligation to prepare an accurate SPD. Although the plaintiffs had presented no evidence at trial that the Committee was unjustly enriched, there was a serious question as to whether participants had been harmed by the Committee's failure to clearly explain the terms of the plan.
This question was important because the majority opinion in Amara had expressly suggested that the deprivation of a right guaranteed by ERISA could constitute "harm" for this purpose. The Amara dissent, on the other hand, had argued that such harm required either actual reliance on the defective SPD or the lost opportunity to object to a change in the benefit formula.
If the Ninth Circuit had adopted the Amara majority's suggestion that depriving participants of their statutory right to an accurate SPD satisfied the "harm" requirement, the path would have been clear to a damages award against the Committee. The court nipped this interpretation in the bud, however, by flatly stating that the plaintiffs had failed to demonstrate that their position would be any different had they received accurate SPDs.
What Does This Mean for Plan Sponsors?
At first glance, Skinner looks like good news for plan sponsors and fiduciaries. After all, the first federal court of appeals to apply Amara has flatly rejected the most expansive interpretation of the majority opinion--i.e., that the terms of an inaccurate SPD might be enforceable because the inaccuracy itself "harms" the participant. And that is good news for sponsors and fiduciaries.
But this is only one way to look at the case. Viewed from another perspective, Skinner was a disaster for the plan sponsor. It may have won the case, but it spent five years in entirely preventable litigation with its own retirees because it had distributed an inaccurate SPD. The only safe approach to ERISA's disclosure requirements is to provide timely and accurate participant communications. Doing anything less than that is simply asking for trouble.
Lawrence Jenab, Partner
Spencer Fane Britt & Browne LLP