Variety Corp. v. Howe: Will it Cause an Increase in Litigation Against Employers Who Administer Erisa Plans? - Tina Knight Kukanza

• Publication year: 1997

Varity Corp. v. Howe: Will it Cause an Increase in Litigation Against Employers Who Administer ERISA Plans?

In Varity Corp. v. Howe,¹ the United States Supreme Court held that section 502(a)(3) of the Employee Retirement Income Security Act of 1974 ("ERISA")² authorizes an award of relief to an individual for a breach of fiduciary duty by the administrator of an employee benefit plan covered by ERISA and affirmed the relief awarded.³

I. Factual Background

In the mid-1980s, Varity Corporation ("Varity") and its wholly-owned subsidiary, Massey-Ferguson, Inc. ("Massey-Ferguson"), devised a corporate reorganization designed to transfer Massey-Ferguson's money-losing divisions and various debts to a newly created corporation, Massey Combines.⁴ One of Varity's objectives was to eliminate obligations to pay nonpension benefits to employees in those unprofitable divisions covered by Massey-Ferguson's self-funded employee welfare benefit plan.⁵ Instead of exercising its reserved right to terminate employee benefits directly, Varity persuaded those employees to transfer to the new company.⁶ The employees who transferred relinquished their status as participants in and beneficiaries of Massey-Ferguson's plan in exchange for coverage under Massey Combines' self-funded plan because Varity assured them that their plan benefits would be secure.⁷ Varity also transferred to Massey Combines its obligation to pay benefits to certain retired Massey-Ferguson workers without the retirees' knowledge or permission.⁸

When Massey Combines failed, employees who retired both before and after the reorganization lost their benefits and sued Varity and Massey-Ferguson seeking reinstatement in Massey-Ferguson's ERISA plan.⁹ After finding that Varity and Massey-Ferguson had harmed the plan beneficiaries through deliberate deception while acting as ERISA fiduciaries, the United States District Court for the Southern District of Iowa held that the companies had violated their fiduciary obligation under ERISA section 404(a)¹⁰ "to administer Massey-Ferguson's benefit plan 'solely in the interest of the participants and beneficiaries' of the plan."¹¹ The court also held that ERISA section 502(a)(3)¹² authorized the lawsuit and relief by giving the former employees the right to obtain appropriate equitable relief for "the harm that this deception had caused them individually."^1,3 The court gave the former employees a choice of being reinstated into the Massey-Ferguson plan or taking compensatory damages awarded by the jury.¹⁴ The Eighth Circuit Court of Appeals affirmed but set aside the compensatory damages.¹⁵ The Supreme Court granted certiorari primarily to resolve disagreement among the federal courts of appeals about the proper interpretation of ERISA section 502(a)(3).¹⁶ The Court affirmed that section 502(a)(3) authorizes an award of relief to individuals harmed by a plan administrator's breach of fiduciary duty.¹⁷

II. Legal Background

ERISA was enacted in 1974 to protect participants in and beneficiaries of employee benefit plans "by establishing standards of conduct, responsibility, and obligation for fiduciaries . . . and by providing for appropriate remedies, sanctions, and ready access to the Federal courts."¹⁸ Several provisions in ERISA address fiduciary responsibility and authorization to sue. For example, ERISA section 404(a) imposes a "prudent man standard of care" on fiduciaries to act "solely in the interest of the participants and beneficiaries."¹⁹ In addition, ERISA section 409(a) establishes personal liability for a fiduciary who breaches any of the fiduciary duties imposed by ERISA.²⁰ Furthermore, ERISA section 502(a) provides, in part, that a civil action may be brought by the following parties:

(1) by a participant or beneficiary . . . (b) to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan;

(2) by the Secretary, or by a participant, beneficiary or fiduciary for appropriate relief under section 1109 of this title;

(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (b) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan;

(5) except as otherwise provided in subsection (b) of this section, by the Secretary (A) to enjoin any act or practice which violates any provision of this subchapter, or (b) to obtain other appropriate equitable relief (i) to redress such violation or (ii) to enforce any provision of this subchapter.²¹

Two Supreme Court decisions interpreting ERISA provisions contributed to the legal background of Varity. In 1985 the Court held in Massachusetts Mutual Life Insurance Co. v. Russell²² that ERISA section 409 did not authorize compensatory or punitive damages against a plan administrator who had wrongfully delayed payment of the plaintiff's claim for benefits.²³ The Court said that the text of section 409 "persuades us that Congress did not intend that section to authorize any relief except for the plan itself."²⁴ In Russell, the plaintiff sued under ERISA section 502(a)(2), which cross-references ERISA section 409, not under ERISA section 502(a)(3).²⁵ In a concurring opinion joined by three other justices, Justice Brennan said that the Court's narrow holding did not preclude consideration of whether ERISA section 502(a)(3) authorizes awards to individuals for a breach of fiduciary duty.²⁶

In 1993 the Court held in Mertens v. Hewitt Associates²⁷ that ERISA section 502(a)(3) does not authorize suits for legal damages, including compensatory and punitive damages.²⁸ The petitioners asserted that the denial of monetary damages failed to recognize "ERISA's roots in the common law of trusts."²⁹ However, the Court stated that even though money damages were available against trustees in equity courts, which had exclusive jurisdiction over actions by beneficiaries for breach of trust at common law, equitable relief in the context of ERISA refers to relief typically available in equity, such as injunction, mandamus, and restitution.³⁰ The Court also said that the "authority of courts to develop a 'federal common law' under ERISA ... is not the authority to revise the text of the statute."³¹ Therefore, courts cannot add to the remedies listed in the statute.

After the Supreme Court decided Russell, the Ninth Circuit,³² the Eleventh Circuit,³³ and the Sixth Circuit³⁴ held that ERISA section

502(a)(3) does not authorize awards of relief to individuals for a breach of fiduciary duty. In contrast, the Third Circuit,³⁵ the Seventh Circuit,³⁶ and the Eighth Circuit³⁷ have not extended the holding in Russell to ERISA section 502(a)(3). For example, in McLeod v. Oregon Lithoprint Inc.,³⁸ the petitioner sued her employer and the employee benefit plan for failing to notify her that she was eligible to apply for cancer insurance.³⁹ Her doctor diagnosed her with cancer before she was notified of her eligibility, and she sued in part to recover compensatory damages equal to the benefits she would have received if she had been covered.⁴⁰ The Ninth Circuit said it was bound by its prior decision in Watkins v. Westinghouse Hanford Co.⁴¹ to extend the Supreme Court holding in Russell to ERISA section 502(a)(3) based on the Court's language "implying that all of the statute's provisions relating to fiduciary duties run only to plans, and not to . . . individuals."⁴² Similarly, in Simmons v. Southern Bell Telephone & Telegraph Co.,⁴³ the Eleventh Circuit interpreted Russell to mean that ERISA section 409 provided the sole basis for suits involving breach of fiduciary duty and did not authorize an individual beneficiary to recover in those cases.⁴⁴ The Sixth Circuit also followed this reasoning in Vespasian v. Sweeney,⁴⁵ a case that was decided after the Eighth Circuit's decision in Howe v. Varity Corp.⁴⁶

However, the Third Circuit followed the approach of Justice Brennan's concurring opinion in Russell and held that ERISA section 502(a)(3) does authorize an individual plaintiff to recover for breach of fiduciary duty.⁴⁷ The Seventh Circuit reached the same conclusion in Anweiler v. American Electric Power Service Corp.⁴⁸ after considering the Supreme Court's limitation of its holding in Mertens to the forms of relief available under ERISA section 502(a)(3) rather than to the parties who could obtain relief.⁴⁹ The court was also influenced by the Secretary of Labor's amicus curiae brief, which took the position that Mertens allows an individual to recover under ERISA section 502(a)(3) for a fiduciary's breach of duty.⁵⁰

III. Rationale of the Court

In Varity Corp. v. Howe, the Supreme Court held in a six-to-three decision: (1) that the employer was acting as an ERISA fiduciary when it deliberately misled employees based on the facts determined by the lower courts; (2) that the employer violated the fiduciary obligations of ERISA section 404; and (3) that ERISA section 502(a)(3) gives individual beneficiaries the right to appropriate equitable relief when they are harmed by an administrator's breach of fiduciary obligations.⁵¹

Holding that Varity was acting as a fiduciary, the Court noted that ERISA section 3(21)(A)⁵² provides that persons are fiduciaries of a plan and are subject to ERISA fiduciary duties to the extent that they exercise any discretionary authority or discretionary control in plan management or any discretionary authority or discretionary responsibility in plan administration.⁵³ Interpreting management and administration based on common law trust principles, the Court said that "[cjonveying information about the likely future of plan...