Federal common law and gaps in federal statutes: the case of ERISA plan limitation periods for section 502(a) (1) (B) actions.

• Author: Greiner, Jim

[W]here power of choice [between state and federal lawl exists, what are the criteria for its exercise; under what circumstances should a federal substantive rule be prescribed, and when should state law be incorporated?(1)

Over thirty-five years ago Professor Paul Mishkin posed his question in what has become a canonical work(2) in the area of federal common law; the answer to Mishkin's question is not clear today. The lack of set criteria in this area is no doubt due in part to the stunning variety of factual and legal situations in which Mishkin's question can arise. This Note seeks to contribute to the understanding in this field by examining a particular federal common law issue: the validity of clauses within employee benefits plans purporting to set an enforceable limitation period for a cause of action filed under section 502(a)(1)(b) of the Employee Retirement Income Security Act of 1974 (ERISA).(3) The aim of this Note is thus twofold. Its narrow purpose is to argue that federal courts should enforce ERISA plan limitation periods providing a reasonable length of time for a lawsuit,(4) and that they should do so regardless of the law of any particular state. The more general project is to develop a framework for deciding when federal courts exercising their federal common lawmaking powers to provide a rule of decision for a particular case should borrow state law or construct a uniform national rule. The framework developed in this Note consists of a series of factors that the Supreme Court has looked to in past cases when answering the question Mishkin posed. These factors should provide partial guidance to federal courts confronting federal common law questions in statutory contexts other than ERISA section 502(a)(1)(B) lawsuits.

INTRODUCTION

ERISA regulates pension and welfare plans adopted for the benefit of employees and their dependents.(5) Congress sought to protect the interests of participants in employee benefits plans(6) by regulating the administration of such plans and by providing employee-beneficiaries a variety of remedies to assure compliance with the statutory framework.(7) As part of this system of remedies, ERISA section 502(a)(1)(B) grants plan participants a federal cause of action against the plan to recover wrongfully denied benefits.(8) Because benefits plans often provide a wide variety of services such as medical insurance, vacation pay, and retirement payments,(9) the scope of section 502(a)(1)(B) extends to wrongful denial of a large array of benefits.

ERISA provides no statute of limitations applicable to a section 502(a)(1)(B) lawsuit.(10) The Supreme Court has held that "[w]hen Congress has not established a time limitation for a federal cause of action, the settled practice has been to adopt a local time limitation as federal law if it is not inconsistent with federal law or policy to do so."(11) That is, federal courts confronting a federal statutory cause of action without a limitation period "close [the] interstices in federal law"(12) or "fill the gap left by Congress,"(13) and they do so typically by borrowing a state statute of limitations. In so doing, federal courts construct federal common law(14) by adopting state statutes of limitations as the rule of decision for federal causes of action.(15) Almost all federal circuit courts of appeals have followed this practice for ERISA section 502(a) actions, including lawsuits under section 502(a)(1)(B).(16) The majority of courts considering this limitation issue in the context of a section 502(a)(1)(B) suit have applied the state statute of limitations for actions on a written contract.(17)

Almost all federal courts have also borrowed state law(18) to decide the related issue that is the subject of this Note: whether to enforce plan provisions that modify the applicable limitation period for a section 502(a)(1)(B) lawsuit.(19) These courts have enforced shorter limitation periods contained within plans if state law allowed contractual modification of limitation periods. Those courts looking to state contract law have followed the general sense among federal courts that an ERISA plan is in some ways analogous to a contract,(20) and that section 502(a)(1)(B) actions are analogous to actions for breach of contract.(21) Only one federal district court has disagreed, stating that "[t]hose state courts which have addressed the issue of whether parties may modify a state statute of limitations by a mutually agreed upon contract provision did not reach their conclusions with national interests in mind."(22)

The validity of plan provisions modifying the relevant state limitation period is a matter of great importance to parties litigating a section 502(a)(1)(B) lawsuit. If courts invalidate such provisions, the state statute of limitations for suits on a written contract probably will govern.(23) Such limitation periods typically are long, some of them ten years or more,(24) and exposure to potential lawsuits for such lengthy time periods could adversely affect plan management. If courts enforce plan modifications, however, employees will have a shortened opportunity to recover benefits otherwise due under ERISA.(25)

The question of whether to borrow state law to determine the validity of plan limitation periods is similar to questions facing courts that confront other contractual modifications in suits arising under the Commodity Exchange Act,(26) the Federal Emergency Petroleum Allocation Act of 1973,(27) and 42 U.S.C. [sections] 1981.(28) All of these courts, like most courts considering the question in the context of ERISA section 502(a)(1)(B), have borrowed state law to decide the validity of the contractual limitation periods.

Judges determining the validity of ERISA plan limitation periods must first address the preliminary question of whether to borrow state law or to construct a uniform national rule to decide the issue. If federal courts borrow state law, then the enforceability of plan modifications will vary from state to state, depending on state common and statutory law.(29) If Courts refuse to borrow state law, they must construct a uniform national rule to decide the validity of plan limitation periods, raising the question of whether this national rule should uphold or invalidate such plan provisions. At least since 1868, federal courts have applied a common law rule that the parties to a contract may shorten the applicable limitation period so long as no statute provides otherwise and so long as the contract's modified period provides a reasonable length of time for Suit.(30) If federal courts apply this common law rule to ERISA actions, then courts must enforce reasonable plan limitation periods; if the rule does not apply, such modifications may be held invalid.

This Note argues that federal courts should adopt a uniform national rule that upholds plan provisions modifying the limitation period for a section 502(a)(1)(B) action. Part I examines the reasoning of those courts that have borrowed state law to determine the validity of modifications of the limitation period applicable to actions arising under ERISA section 502(a)(1)(B) and under other federal statutes. Part I argues that those courts may have incorrectly characterized the validity of plan limitation periods as an issue of limitation law. As a consequence of this characterization, those courts have followed the Supreme Court's rule that, when borrowing a state's statute of limitations, federal courts should also borrow the state's law regarding the "overtones and details" of the limitation period.(31) Part I argues, however, that the validity of contractual limitation periods is not an overtone or detail of a statute of limitations, and thus that federal courts have erroneously applied the overtones or details principle as a justification for borrowing state law on the modification issue.

The next two Parts then examine other sources to determine whether -- and how -- courts should enforce plan modifications of applicable state limitation periods. Part Il argues that the purpose behind the preemption of state law effectuated by ERISA section 514(a)(32) suggests that federal courts should formulate a uniform national rule without reference to the law of any particular state. Because -- as Part II also shows -- there is reason to think that section 514(a) does not fully dispose of the issue, Part III looks to principles of federal common law for further support. Specifically, Part III identifies a list of factors that courts should consider when deciding whether to borrow state law in a suit arising under a federal statute, then applies these factors to the question of the validity of plan limitation periods. These principles lead to the simultaneous conclusions that (i) federal courts should adopt a uniform national rule governing the validity of plan limitation periods, and (ii) that this rule should declare reasonable plan limitation periods valid and enforceable.

Finally, Part IV rejects concerns that the rule recommended in Part III conflicts with the purposes or policies of ERISA. In particular, Part IV argues that the federal court habit of relying on preexisting common law to fill in gaps in federal statutes suggests that a similar practice in this instance is unlikely to conflict with Congress's intent. Furthermore, Part IV concludes that upholding plan limitation periods is consistent with congressional intent even if enforcing such periods causes some meritorious section 502(a)(1)(B) claims to fail.

1. CHARACTERIZATION OF THE MODIFICATION ISSUE

   This Part argues that those federal courts borrowing state law to decide the validity of plan limitation periods have erroneously characterized the issue as one of limitation law. The argument proceeds in three steps. Section I.A outlines the basic history and modern structure of the borrowing doctrine as articulated by the Supreme Court. This doctrine dictates that courts should...