Darkness at noon: judicial interpretation may have made things worse for benefit plan participants under ERISA than had the statute never been enacted.

AuthorStumpff, Andrew
  1. OVERVIEW II. ERISA III. JUDICIAL RESTRICTION OF PARTICIPANT RIGHTS A. Preemption B. Deferential Review of Plan Administrators' Decisions C. Limitations on Remedies and Causes of Action 1. Exhaustion of Administrative Remedies 2. No consequential damages 3. No punitive damages 4. Employer allowed to set the statute of limitations IV. CUMULATIVE EFFECTS V. CAVEATS A. ERISA's Benefits 1. The Objection 2. Response B. ERISA's drafters wouldn't have been so surprised by the results reached by the courts 1. The Objection 2. Response VI. THE UPSHOT: AN ACCOUNTING A. EFFECTS OF ERISA Is there anything the writer of a rule can do to make sure courts apply the rule as the writer intends? Prominent 20th century American legal theorists took a pessimistic view. One early commentator put it this way: "We are under a Constitution, but the Constitution is what the judges say it is." (1) Another reputedly remarked that a case's outcome is less determined by the text of "the law" than by what the judge had for breakfast. (2) The claims of so-called "Legal Realists" about the weakness of objective words as a constraining force (3) have struck a number of observers as questionably extreme, as overstated. (4) But sometimes it seems there might be something to them.

    For anyone who has tried to help a retiree collect a pension or an employee receive a medical reimbursement, the Employee Retirement Income Security Act of 1974, or ERISA, (5) serves as an illustration. Last year marked the 35th anniversary of the effective date of this law, which was adopted to great acclaim by legislators who thought they were striking a blow for the rights of participants in employer-sponsored pension and other benefit plans. We know that is what they thought because they said so, in the Act itself (6) and in the legislative record. (7) ERISA is an example of a statute having what has been called a "singing reason." (8)

    Despite that, the federal courts have felt themselves free in the decades since to resolve a long series of questions under ERISA against plan participants and in favor of employers. (9) The strength of an ERISA plaintiff's legal position has steadily eroded, to the point where today it is routinely the case that a plan participant can prevail only if he is able to persuade a court that ERISA does not apply to his case. (10) And for exactly that reason--to make it harder for participants to enforce their rights companies now go out of their way to make sure that the plans they establish or administer are, in fact, subject to ERISA. (11) This is a remarkable situation. It suggests employees are worse off than they would have been had the statute never been enacted.

    How this came to be is worth considering. At thirty-six, ERISA's judicial history is significant in its own right--for example, from the standpoint of American retirement and health insurance policy. (12) But this history is also a study in the power that legislative words do not have over judges. It may be a data point partially vindicating Legal Realism. (13)

  2. OVERVIEW

    Courts have constricted the rights of employee benefit plan participants under ERISA in a number of ways, the most prominent of which are catalogued in Part III below. The cumulative effect of these decisions, however, can only be appreciated by taking them together--by considering the overall position of a plan participant under ERISA, as interpreted, relative to the participant's position had ERISA not been enacted. That task is undertaken in Parts IV and later parts of the article.

    The review of ERISA case law in this article is intended only as a survey: Much more has been written on the individual issues raised below than is recounted here. (14) References are included to provide the interested reader with an embarkation point for further investigation, but the author's immediate objective is to identify these various judicial trends in one place, to convey how cumulatively devastating to employee benefit plan participants they have now proved.

  3. ERISA

    For context we first recall the history of ERISA, and the promise it appeared to hold for plan participants at the time it was enacted. The initial political impetus for ERISA was provided by a single event--the loss of pension benefits by thousands of workers and retirees when Studebaker Corporation closed its remaining automotive operations in South Bend, Indiana, in December, 1963. (15) The incident focused the attention of Congress and the public (aided, eventually, by press coverage that included an NBC prime-time news report) (16) on the role employer-provided plans had come to play in providing pension and health care benefits to ordinary Americans, and the degree to which those plans were then going unregulated. In this way, Studebaker (17) provided political cover for the creation and passage of what became a much broader, far-reaching statute intended to remedy perceived shortcomings in many aspects of employee benefit plan operations (18) (much as a single bankruptcy forty years later, of Enron Corporation, would catalyze a variety of legislative reforms of corporate governance). (19)

    In the new statute, Congress attempted to avoid future Studebaker incidents by creating a system of required funding and insurance of traditional, "defined benefit" pension plans. (20) The House and Senate committees also heard testimony about a number of other problems faced by benefit participants--ranging from unrealistically long periods required for new employees in order to participate and "vest" in pension plan benefits, to problems employees encountered simply in discovering from their employer the material terms of a plan, to plan "insiders" diverting plan assets to their own use. (21)

    In response to all these issues, ERISA ushered in a far-reaching regulatory regime for employee benefit plans. (22) This included, among other things: 1) an explicit enforcement structure involving the Internal Revenue Service, Department of Labor, and newly created Pension Benefit Guaranty Corporation; 2) requirements that plans be in writing and effectively communicated to employees, and that pension plans not impose unduly long service requirements; and 3) a set of rules governing conduct by a newly defined class of "plan fiduciaries" and other plan "parties in interest." (23) As has (ironically) been recited by courts many times since, ERISA was a "remedial" statute, in the sense that it was intended to fix problems that put plan participants at risk before the statute was created. (24)

    Upon the law's enactment--it was signed in September 1974, as one of recently inaugurated President Gerald Ford's first official acts--the bill's principal driver, Senator Jacob Javits of New York, pronounced it "the greatest development in the life of the American worker since social security." (25) Ford himself said that "this Act makes a brighter future for almost all the men and women of our labor force." (26) Senator Robert Dole described the law as an "economic bill of rights" for workers. (27)

    Things haven't quite worked out that way. To be sure, a generically apparent Congressional motivation to protect plan participants would be a questionable basis for courts to create fights not provided in the text of the statute. It might have been expected, however, that as to close questions--questions where the text is ambiguous, where more than one interpretation may be equally plausible--courts would have been influenced by the statute's overwhelmingly obvious purpose to be, at minimum, inclined to come down on the side of participants. They have inclined in the opposite direction.

    The following Part enumerates some important ways ERISA has been interpreted by courts to restrict participant rights. Those interpretations would not be nearly the problem they are for plan participants, however, had the statute not removed from participants the right to bring any claims not arising under ER/SA--claims, for example, that might otherwise have been brought under state law. Part III thus begins by discussing ERISA's preemption clause.

  4. JUDICIAL RESTRICTION OF PARTICIPANT RIGHTS

    1. PREEMPTION.

      Before ERISA was enacted, employee benefit arrangements, like pensions or health insurance plans, were just contracts (and sometimes trusts), subject to the rules of state law. (28) State laws obviously differ from each other, which might raise practical problems for large employers with employees in many states. It was, as argued at the time, difficult for such a plan sponsor to predict the enforceable effect of a given plan provision in all the jurisdictions where the sponsor might have operations. (29) Thus, an issue that received specific attention in the run-up to ERISA was the idea of preemption: ERISA should "occupy the field" of employee benefits law, providing sponsors and participants with a uniform set of federal standards for interpreting and applying employee benefit plan provisions. The resulting preemption clause was called by one of ERISA's co-sponsors (at the time of enactment, before all the clause's effects had, perhaps, been fully apprehended) the statute's "crowning achievement." (30)

      The ERISA preemption clause, Section 5 14(a), (31) says that Titles I and IV of ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." The words "relate

      to" are operative. The clause has been described as "the most sweeping federal preemption statute ever enacted by Congress." (32) (The effect is ameliorated, a little, by Section 514(b), which "saves" from preemption particular types of state laws including those which regulate insurance, banking, or securities, and also any "generally applicable criminal law of a State.") (33)

      By 1985 commentators had already concluded that "On the basis of the experience in the courts and Congress in the ten years since ERISA's enactment, it is clear that the inclusion of section...

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