THE FIDUCIARY CORNER: Supreme Court Decision Requires New Focus on Participant Communications
Gregory L. Ash, Monday, August 15, 2011 | Filed under: ERISA Litigation, Fiduciary Duties, Participant Communications
A long-awaited ruling issued by the United States Supreme Court this spring gives employers both reason to celebrate and cause for concern. The Court’s decision in CIGNA Corp. v. Amara (May 16, 2011) reaffirms that courts will not enforce benefit rights that are described in a summary plan description (“SPD”) as if those rights were actually set forth in the plan document. At the same time that it foreclosed this avenue of relief for plan participants, however, the Court apparently opened up another by concluding that participants who are actually harmed by inconsistent or misleading plan summaries may have an equitable right to be compensated for that harm. As a result, participant communications are likely to be a new source of ERISA litigation in the coming years.
The Amara case arose out of CIGNA’s decision to convert its traditional defined benefit pension plan into a cash balance plan. A group of plan participants sued in 2001, contending, among other things, that CIGNA’s description of the conversion did not comply with the notice requirements under ERISA Section 204(h) and that other communications led them to the mistaken belief that their benefits under the converted plan would always be greater than their benefits under the old formula.
The district court agreed that the communications were misleading and granted relief by essentially re-writing the plan so that it would provide benefits that were more consistent with those that CIGNA had described to participants. The court found support for this remedy in ERISA Section 502(a)(1)(B), which allows a participant to recover benefits “due to him under the terms of the plan.”
The district court also considered another provision in ERISA — Section 502(a)(3), which authorizes any other “appropriate equitable relief” — as a basis for the remedy it afforded. Ultimately, however, the court opted not to apply that provision in light of several previous Supreme Court decisions that, in its view, had limited the equitable relief available under Section 502(a)(3). The Second Circuit Court of Appeals summarily affirmed the district court’s decision.
In a May 2011 ruling joined by all eight of the Justices who participated (Justice Sotomayor abstained), the Supreme Court rejected the rationale employed by the lower courts, finding that Section 502(a)(1)(B) does not authorize a court to re-write the terms of an ERISA plan. The Court concluded that this Section permits courts only to interpret or enforce existing plan provisions; it does not permit courts to change a plan’s terms.
In addition, the Court held that the terms of the SPD — which described the enhanced benefits the participants sought — could not be enforced under Section 502(a)(1)(B) as if they were the terms of the plan itself. According to the Supreme Court, representations about a plan in the SPD cannot themselves be considered part of the plan. Thus, the Supreme Court rejected numerous lower court rulings that had found SPDs enforceable as “plan documents.”
But at the same time that the Supreme Court closed the door on recovery through Section 502(a)(1)(B), it apparently opened an even larger door through which the participants’ claims might proceed — the “equitable relief” afforded under Section 502(a)(3). A majority of the Court found that the type of relief the district court granted could be considered “appropriate equitable relief” under that Section. Although ERISA litigators had long understood previous Supreme Court precedent to preclude awards of monetary relief — or “damages” — under Section 502(a)(3), six justices rejected that interpretation. (Justices Scalia and Thomas did not join this part of the opinion.)
The Amara Court carefully described a number of equitable remedies that might be available under Section 502(a)(3) to the plaintiffs in this case (and analogous cases), including monetary compensation. Those theories include:
- “Reformation” of a contract (i.e., re-writing a plan’s terms);
- “Estoppel” (i.e., denying a plan sponsor the right to rely on the plan’s terms when it has made contrary representations to participants); and
- “Surcharge” (a form of monetary compensation against a trustee or other fiduciary).
After
Amara, the mere fact that the relief sought by plan participants is measured in dollars will not preclude them from filing suit under Section 502(a)(3).
Amara therefore presents a mixed bag for employers and plan fiduciaries. Although the Supreme Court’s holding on the enforceability of SPD provisions is welcome news, its discussion of equitable relief is not. The ERISA plaintiffs’ bar will undoubtedly use Amara to support claims for a broad range of equitable relief — including monetary compensation in the form of surcharge — that had previously been foreclosed by lower courts. Claims that would have been summarily dismissed for failure to plead an appropriate remedy under Section 502(a)(3) — for example, because they sought monetary damages — might now survive. This will increase both the likelihood and cost of ERISA litigation.
Litigation involving incomplete or misleading benefit descriptions is certain to increase. Such claims will include those involving an SPD or summary of material modifications that is inconsistent with the terms of the underlying plan, notices that do not adequately describe plan changes, erroneous benefit estimates, mistaken communications about eligibility for health plan coverage, incomplete or erroneous representations made by call center employees or human resource managers about 401(k) balances or distribution rights, and corporate communications describing the employer’s benefit plans.
Plaintiffs’ attorneys will look for inconsistencies between such communications and the underlying plan terms. It is therefore more important than ever that plan sponsors carefully vet all of their participant communications.