SC Lawyer, January 2009, #1. When Benefit Administrators Have Conflicts of Interest Supreme Court Weighs in on the Proper Standard of Review.

South Carolina Lawyer

2009.

SC Lawyer, January 2009, #1.

When Benefit Administrators Have Conflicts of Interest Supreme Court Weighs in on the Proper Standard of Review

South Carolina LawyerJanuary 2009When Benefit Administrators Have Conflicts of Interest Supreme Court Weighs in on the Proper Standard of Review"So standards of review do matter, for in every context they keep judges within the limits of their role and preserve other decision-makers' functions against judicial intrusion. But deference has a particular significance in the context of ERISA."-Judge Wilkinson, Evans v. Eaton Corp. Long Term Disability Plan, 514 F.3d 315, 318 (4th Cir. S.C. 2008).

Though often described as a comprehensive and reticulated statutory scheme, the Employee Retirement Income Security Act of 1974 (ERISA) suffers from significant gaps in its application to employee benefits administration. One of the more important omissions can be found in the absence of a specified standard of review for courts to apply when evaluating benefit claims denials.

Thus, though ERISA authorizes an employee to file suit in federal court to recover benefits due under the terms of a benefit plan, see, 29 U.S.C. §1132(a)(1)(B), the statute fails to set forth the standard for federal district courts to apply when evaluating claims under the statute. To fill this void, the federal courts have endeavored to develop a standard of review that shows proper regard for the statutory purpose of protecting benefit entitlements while at the same giving appropriate deference to benefit decisions by plan fiduciaries.

This article will set forth the basic paradigm for judicial review of benefit denials as developed in the Fourth Circuit and explore changes in that paradigm implicated by the recent Supreme Court decision in Metro. Life Ins. Co. v. Glenn, S. Ct. 2343 (2008). Particular attention will be given to the potential effect the decision may have in augmenting the list of factors articulated by the Fourth Circuit as appropriate in evaluating benefit decisions for an abuse of discretion.

The basic standard of review dichotomy

Until its recent decision in Metro. Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (2008), the U.S. Supreme Court had only once provided guidance on what standard of review should apply in judicial review of employee benefit claim denials under ERISA. In that earlier decision, the Supreme Court held that a district court should apply a de novo standard of review unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. See Firestone Tire & Rubber Co. v. Bruch, 109 S. Ct. 948 (1989).

In a sense, therefore, the question of the applicable standard of review to be applied by district courts when reviewing an ERISA plan's denial of benefits appeared reducible to a simple dichotomy. Following Firestone, if the plan conferred discretion upon the fiduciary, then the district would review the benefit decision for an abuse of discretion - if not, the review would be de novo.

Things were not to be so simple. In the years following Bruch, the circuit courts divided on how to implement an important, but enigmatic, proviso in the opinion relating to conflicts of interest. In the words of the Court:

if a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a "facto[r] in determining whether there is an abuse of discretion." Bruch, 109 S. Ct. 948, at 957 (citing, Restatement (Second) of Trusts § 187, Comment d (1959). The Court left this issue open for resolution by the federal judiciary.

A practical example

To bring the issue into practical terms, consider the situation presented where an employer provides a group disability benefit through an insurance policy issued by a disability insurance carrier. Assume that the terms of the policy designate the carrier as the claims administrator and confers discretion upon the carrier as such to interpret the terms of the plan. Thus, under the terms of its policy, the carrier both determines whether to pay claims and funds the claims that it pays. (Similar instances can arise under other forms of ERISA benefits plans where a claims administrator of an ERISA plan also funds the plan benefits.)

If a plan participant's claim for disability benefits is denied, does the carrier operate under a conflict of interest? Should this matter, and if so, what should be the effect upon judicial review of the decision? The Glenn decision addresses these issues albeit with less definitive guidance than many had expected.

Emergence of a standard of review

To put the Glenn decision in perspective, it is important to briefly step back in time and understand the issue as it developed historically. Following ERISA's enactment, the Fourth Circuit joined its sister circuits in applying an arbitrary and capricious standard of review when reviewing denials of benefit claims. See Whipp v. Seafarers Vacation Plan, 832 F.2d 853, 856 (4th Cir. 1987). In subsequent years, the Fourth Circuit took a more nuanced approach in reaction to the Supreme Court's decision in Firestone.

For example, in Booth v. Wal-Mart Stores, Inc., 201 F.3d 335, 341 (4th Cir. 2000), the Court observed that:

A survey of our cases decided after Firestone reveals a certain ambiguity about the appropriate standard of review of a fiduciary's discretionary decision -- whether it is "abuse of discretion" or "arbitrary and capricious" and whether the two standards are equivalent. In a number of decisions we stated expressly that we were not prepared to decide whether the abuse of discretion standard differs from the arbitrary and capricious standard.

Thus, the Court refined the applicable standard in Booth, stating that (1) "we continue to recognize that an `arbitrary and capricious' standard is more deferential to the fiduciary than is an `abuse of discretion' standard" and (2) "we affirm that the abuse of discretion standard, not the arbitrary and capricious standard, is the appropriate one for judicial review of a fiduciary's discretionary decision under ERISA."

Conflicts of interest

Based upon its interpretation of Bruch, the Fourth Circuit joined the Third, Fifth, Ninth, 10th and 11th Courts of Appeal in concluding that a plan administrator that also pays plan benefits operates under a conflict of interest that must be taken into account on judicial review of a benefit determination. See, e.g., Carolina Care Plan Inc. v. McKenzie, 467 F.3d 383, 386-387 (4th Cir. 2006), cert. dismissed, Nos. 06-1182 & 06-1436 (July 30, 2007). Further, in determining the effect of a conflict of interest, the Fourth Circuit joined the majority of Courts of Appeal in adjusting the deference afforded under the abuse of discretion standard on a "sliding scale," depending on the seriousness of the conflict of interest, so as to neutralize the effect of the conflict. See, e.g., Doe v. Group Hospitalization & Med. Servs., 3 F.3d 80, 87 (4th Cir. 1993).

Where an administrator operates under a conflict of interest, the Fourth Circuit has required a principled reason for the benefit denial that is supported by substantial evidence. See Bynum v. CIGNA Healthcare of N.C., Inc., 287 F.3d 305, 313 (4th Cir. 2002). In Bynum, CIGNA denied reimbursement for medical expenses necessary to correct congenital defects in an infant's neck and skull. Noting CIGNA's substantial conflict of interest, the Fourth Circuit observed:

CIGNA's conflict of interest in its handling of Katrina's Claim was a substantial one, i.e., CIGNA possessed a significant incentive, in the nature of its financial self-interest, to deny coverage for Katrina's Claim. The Court thus characterized its task as follows: while we will accord CIGNA's coverage determination some deference, its decision must be examined closely to ensure that it is "supported by substantial evidence," and that it resulted from "a deliberate, principled reasoning process." (citing, Brogan v. Holland, 105 F.3d 158, 161 (4th Cir. 1997).

The Fourth Circuit in Bynum ultimately concluded that CIGNA abused its discretion in that the claims denial was neither "supported by substantial evidence" nor the result of "a deliberate, principled reasoning process."

On balance, the Glenn decision suggests the essential soundness of the Fourth Circuit's jurisprudence on this issue, though the factor-based approach taken in Glenn suggests that the Fourth Circuit may find it necessary to refine its analysis in several particulars. This subject will be reserved, however, until after a discussion of the Supreme Court's analysis of conflicts of interest in Glenn.

The conflict in the circuits

When the Supreme Court granted the petition for certiorari in Metro. Life Ins. Co. v. Glenn, the Circuit Courts of Appeal were split into at least two camps on whether a conflict of interest should matter, and among those answering affirmatively, as many as three different positions on the effect a conflict should have on the standard of review.

The facts in Glenn resemble those in the example given above in that Ms. Glenn's employer's disability plan was insured by a disability carrier that also adjudicated claims. The Sixth Circuit had set aside the carrier's decision as an abuse of discretion, giving some consideration to the conflict of interest, but also giving substantial consideration to other salient facts, such as evidence that MetLife:

* encouraged Glenn to argue to the Social Security Administration that she could do no work; * received the bulk of the benefits of her success in doing so (being entitled to receive an offset from her retroactive Social Security award); * thereafter ignored the agency's finding in concluding that she could do sedentary work; * emphasized one medical report favoring denial of benefits, while de-emphasizing other reports suggesting a contrary conclusion; and * failed to provide its independent vocational and medical experts with all of the relevant evidence. The Supreme Court affirmed the Sixth Circuit, adopting a "combination of factors" analysis that defies specific formulation:

We believe that Firestone means what the word "factor" implies, namely, that when judges review the lawfulness of benefit denials, they will often take account of several different considerations of which a conflict of interest is one.

A "triumph of understatement"

In many respects, the Glenn decision is remarkable for what it disavowed. The majority opinion explains that Firestone's statement that conflicts of interest should be weighed as a factor did not imply a change in the standard of review (e.g., from deferential to de novo review). Nor was Firestone intended to create or encourage special burden of proof rules, or other special procedural or evidentiary rules, focused narrowly upon the "evaluator/payor conflict."

A "combination of factors" approach

When examined for its positive content, the Court may be understood to commend a combination of factors approach to evaluating conflicts of interest that takes into account "several different, often case-specific, factors, reaching a result by weighing all together." In such instances, observed the Court, any one factor will act as a tiebreaker in close cases, "the degree of closeness necessary depending upon the tiebreaking factor's inherent or case-specific importance." The Court also allows for the possibility of countermeasures that a fiduciary may undertake to minimize the effect of a conflict by taking "active steps to reduce potential bias and to promote accuracy."

Implications for Fourth Circuit precedent

The dissent in Glenn forcefully objected to the indeterminacy of the standard articulated by the majority. Among the most significant criticisms, Chief Justice Roberts expressed concern that the majority's approach would allow the bare existence of a conflict to enhance the significance of other factors already considered by reviewing courts, even if the conflict is not shown to have played any role in the denial of benefits. In any event, it must be admitted that the case-by-case approach contemplated by the majority opinion leaves ample room for disagreement as to the effect of the case on existing precedent.

Prior to Glenn, Fourth Circuit law required a district court to consider a number of factors in evaluating a benefit denial under the abuse of discretion standard. These factors include:

(1) whether the administrator's interpretation is consistent with the goals of the plan; (2) whether it might render some language in the plan documents meaningless or internally inconsistent; (3) whether the challenged interpretation is at odds with the procedural and substantive requirements of ERISA; (4) whether the provisions at issue have been applied consistently; (5) whether the fiduciary's interpretation is contrary to the clear language of the plan; (6) the adequacy of the record before the fiduciary is a factor to be considered; (7) the scope of the discretion conferred; (8) the purpose of the plan provision in which discretion is granted; (9) any external standard relevant to the exercise of that discretion; (10) the administrator's motives; (11) any conflict of interest under which the administrator operates in making its decision; and (12) the integrity of the fiduciary's decision-making process. See Booth v. Wal-Mart Stores, Inc., 201 F.3d 335 (4th Cir. Va. 2000).

As noted above, Glenn endorsed a factor-based approach for judicial review of benefit decisions, and in this regard, Fourth Circuit precedent remains on sound footing. On the other hand, the Glenn opinion signals several areas in which changes in Fourth Circuit law are likely.

1. The existence of a conflict of interest

   The Fourth Circuit has held that "the simple and commonplace fact that a plan's administrator is also its funder is not enough to support a finding ofa conflict of interest that would cause an adjustment to our deference." See Colucci v. Agfa Corp. Severance Pay Plan, 431 F.3d 170, 178 (4th Cir. 2005). After Glenn, the Fourth Circuit's position in Colucci must be seriously questioned. See Crowell v. Shell Oil Co., 2008 U.S. App. LEXIS 17229 (5th Cir. Tex. Aug. 14, 2008) (abrogating a similar rule in the Fifth Circuit).

   The implications of this change are considerable. Justice Scalia, in his dissent, specifically notes Glenn's effect on Colucci (though describing it as dictum), stating that the majority opinion stands for the proposition that any employer who administers its own ERISA-governed plan has a conflict of interest.

   Aside from potentially lowering the bar for determining an employer's conflict of interest where it administers its own plan, the Court notes that "the employer's own conflict may extend to its selection of an insurance company to administer its plan." This results from the economic fact that an employer choosing an administrator in effect "buys insurance for others and consequently (when compared to the marketplace customer who buys for himself) may be more interested in an insurance company with low rates than in one with accurate claims processing."

2. The effect of a conflict of interest

   The Fourth Circuit's "sliding-scale standard of review" means that the greater the incentive for the administrator to benefit itself by a certain interpretation of benefit, the more objectively reasonable the decision must be and the more substantial the evidence must be to support it. While the Fourth Circuit's "sliding scale" approach in conflict of interest cases operates similarly to the test applied by the Sixth Circuit in Glenn, the majority opinion's rejection of special evidentiary, procedural or burden-shifting rules suggests some doubt about this metaphor. Cf. Abatie v. Alta Health & Life Insurance Co., 458 F.3d 955 (9th Cir. 2006) (en banc) ("in any given case, all the facts and circumstances must be considered and nothing "slides," so we find the metaphor unnecessary and potentially confusing").

   Though the "sliding scale" can be worked into the Glenn approach to evaluating the effect of conflicts, the metaphor seems anachronistic, if not problematic, under the indeterminate factor-based approach advocated in Glenn that eschews any particular procedural or evidentiary constraint.

3. Limitation of discovery to the administrative record

   As indicated in an unpublished opinion, Abromitis v. Continental Casualty Co., 261 F. Supp. 2d 388 (W.D.N.C. 2003), aff'd 114 Fed. App'x. 57 (4th Cir. 2004), the "conflict of interest" of the administrator's paid employees and consultants has been viewed as irrelevant and thus not subject to discovery. Given the combination of factors approach advanced in Glenn, this restriction may no longer be viable. See Hogan-Cross v. Metro. Life Ins. Co., 2008 U.S. Dist. LEXIS 58027 (S.D.N.Y. July 31, 2008) (specifically questioning Abromitis); Wilcox v. Wells Fargo & Co. Long Term Disability Plan, 2008 U.S. App. LEXIS 15713 (9th Cir. Ariz. July 23, 2008).

4. Integration of administrative law principles

   One of the more striking peculiarities of the ERISA standard of review jurisprudence lies in the administrative law model adopted by the federal district courts for review of decisions by plan administrators. See Berry v. Ciba-Geigy Corp., 761 F.2d 1003, 1006 (4th Cir. S.C. 1985). The Glenn majority opinion further supports the integration of administrative law principles into the context of judicial review of benefit denials by, inter alia, reference to Universal Camera Corp. v. NLRB, 340 U.S. 474, 71 S. Ct. 456, 95 L. Ed. 456 (1951) (review of agency fact-finding). Factors important to review of agency fact-finding may now have additional warrant for consideration in ERISA cases.

5. Standard of care required of insurers

   The Court specifically noted that ERISA imposes "higher-than-marketplace quality standards on insurers." ERISA, observed the Court, requires that the administrator:

   "discharge [its] duties" in respect to discretionary claims processing "solely in the interests of the participants and beneficiaries" of the plan, § 1104(a)(1); it simultaneously underscores the particular importance of accurate claims processing by insisting that administrators "provide a `full and fair review' of claim denials; and it supplements marketplace and regulatory controls with judicial review of individual claim denials," see § 1132(a)(1)(B). (internal quotations omitted).

   Though offered by the Court in support of its conclusion that insurance carriers have a distinctive role in benefit administration that distinguishes them from other market participants, the standard described by the Court will likely find its way into evaluations of carrier conduct for reasonableness.6. Countermeasures reducing the effect of conflict

   The Court allows for mitigation of conflicts of interest where the administrator "has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision-making irrespective of whom the inaccuracy benefits."

   Conclusion

   In the absence of specific guidance from Congress, federal courts have embroidered a standard of review and ancillary procedural requirements into the federal common law of ERISA. Over the 30 years since ERISA's enactment, as Judge Wilkerson noted in Eaton, the Congress could have intervened to adjust the balance implicit in this standard of review. Rather than Congress, however, it has been the Supreme Court that has once again adjusted the scales of judicial review. It remains to be seen how the majority's resignation in Glenn to the "impalpable factors involved in judicial review" will affect the balance between the rights of benefit claimants and stewardship of benefit plan assets.