Sotomayor’s Second Circuit ERISA Cases

Five of the Second Circuit opinions authored by Judge Sonia Sotomayor deal with the Employee Retirement Income Security Act (ERISA). ERISA cases aren’t considered as sexy as a lot of employment law cases, but the number of such cases is growing. The U.S. Supreme Court is occasionally asked to consider a case filed under this complicated statute. Getting a sense for how Sotomayor approaches ERISA is, therefore, useful.

Layaou v. Xerox Corporation, 238 F.3d 205 (2d Cir. 2001)
An employee worked for Xerox from 1972 to 1983, at which time retirement benefits were distributed to him in a lump sum. The employee was rehired in 1987 and remained with Xerox until 1994. The employee earned retirement benefits during this second stretch of employment, and the Xerox retirement plan provided that the employee would receive benefits in an amount equal to the highest result of three alternative calculation methods.

Upon the employee’s retirement, the plan administrator began the calculation of retirement benefits under Xerox’s complicated formula, which required something akin to rocket science to compute. As required by ERISA, Xerox had given its employees an annual Summary Plan Description (SPD) and a yearly estimate of individual benefits. The year before the employee’s retirement, he received documentation estimating that his retirement benefits would amount to $924 per month. However, when the plan administrator completed his calculation of retirement benefits under the Xerox formula, the amount came to $145 per month.

The employee filed suit under ERISA contending that Xerox’s annual SPD didn’t provide employees a thorough, understandable summary of the benefit plan, including how benefits would be calculated. The district court granted the employer’s motion to dismiss the case, finding that the SPD didn’t conflict with the terms of Xerox’s retirement plan and contained sufficient details showing there were situations in which retirement benefits might be reduced. Sotomayor reversed the lower court’s decision.

She ruled that the SPD failed to provide notice to the employee that future benefits would be offset by an appreciated value of any prior lump-sum distributions like the employee had received when he first left Xerox’s employ. In particular, Sotomayor was troubled by the fact that the plan administrator had used a so-called “phantom account” maintained by Xerox to calculate the employee’s benefits, yet the term appeared nowhere in the SPD. Sotomayor returned the case to the lower court to determine what the employee’s benefits should be and to determine whether the employee was entitled to damages for Xerox’s failure to provide an adequate SPD.

Sotomayor’s decision is somewhat unusual given the deference ordinarily given to SPDs, pension plans, and an administrator’s decisions interpreting the plans. Because of the complexity of the Xerox plan, she determined that the company’s SPD should have been more detailed to provide adequate notice to employees as to how benefits would be calculated.

Marcella v. Capital District Physicians’ Health Plan, Inc., 293 F.3d 42 (2d Cir. 2002)
The plaintiff in this case, Carol Marcella, purchased health insurance from a health insurance plan under a group policy offered to a local chamber of commerce, which in turn offered the insurance to its members. Initially, Marcella was a real estate broker affiliated with a franchise of Prudential Realty, which was a member of the chamber. In time, Marcella formed a sole proprietorship and joined the chamber in that capacity.

Marcella had surgery for a brain tumor. The health plan refused to pay for these medical expenses. Marcella filed suit in state court, raising various state-law claims. The case was removed to federal district court on the basis that the health plan was covered by ERISA and not subject to state-law claims. The district court dismissed Marcella’s case, finding that ERISA preempted (or superseded) all state-law claims. Sotomayor reversed.

Although a health insurance plan can be an ERISA plan, Sotomayor ruled that the one held by Marcella wasn’t one because as a sole proprietor, Marcella wasn’t an employer under ERISA. For a health insurance plan to be an ERISA plan, it must be maintained by an employer. U.S. Department of Labor (DOL) regs and opinion letters make it clear, however, that a sole proprietor can’t be an employer for purposes of ERISA. The health plan argued that Marcella’s insurance plan was covered by ERISA because she was initially enrolled in the plan as an employee of Prudential, and, in any event, the chamber was composed of a group of employers, and any plan offered through the chamber was an ERISA plan.

Sotomayor ruled that while Marcella may have initially had access to plan coverage because of her affiliation with Prudential, at the time of the surgery in question, she was covered as a sole proprietor. Moreover, while the chamber was made up of employers, it was also made up of individuals and businesses of all kinds, including sole proprietors. Marcella didn’t qualify as an employer under ERISA, and her lawsuit had been improperly removed to federal court.

In my opinion, this is another somewhat unusual ruling. Most cases involving a health insurance plan are removed to federal court and stay in federal court. This is important from an employer’s standpoint, because under ERISA, an individual is much more limited to what can be recovered than is the case under state law, and it’s much more likely that a decision to deny coverage will be given deference under ERISA, if the case is in federal court.

On the other hand, Sotomayor didn’t pull the basis for her ruling out of thin air. She relied on what the law says an ERISA plan is and isn’t. Under the facts of this case, another judge could have reached a different result, but Sotomayor provided in-depth analysis based on the law itself as to why Marcella could pursue her claims in state court. In state court, a jury is likely to be much more sympathetic to an individual in Marcella’s predicament than would be the case of a federal district judge bound by ERISA’s constraints.

Strom v. Siegel Fenchel & Peddy P.C. Profit Sharing Plan, 497 F.3d 234 (2d Cir. 2007)
Karen Strom started her career as a secretary in the defendant law firm. She went to law school, passed the bar and joined the firm as an attorney. She was promoted to the postion of “partner” and again promoted to “profit-sharing partner.” The three individuals in the firm’s name were “shareholders” in the firm, and senior attorneys like Strom were called “partners” or “profit-sharing partners.” The distinction among these titles was less than clear.

Strom decided to leave the firm and start a new one. She claimed entitlement to benefits under two of the law firm’s pension plans: the Profit Plan and the Cash Plan. The administrators of the plans (the three named shareholders) determined that Strom wasn’t entitled to as much in benefits as she claimed under the Profit Plan and wasn’t entitled to any benefits under the Cash Plan. The administrators gave no explanation for why they had reached these decisions.

Strom filed suit against the law firm, alleging that its actions violated ERISA. The district court ruled in favor of the law firm, saying that it was compelled to give deference to the administrators interpretations of the plans. Deference will often be given to the plan administrators’ interpretations under ERISA, but according to Sotomayor, it was impossible to defer to interpretations that never explained the reasons for the ultimate decisions about Strom’s rights under both plans. Sotomayor ruled that a non-existent interpretation can’t be a reasonable one.

Sotomayor also found that the district court had erred in finding that Strom had waived her claim under the Cash Plan because she failed to exhaust her administrative remedies. Strom couldn’t have waived her rights knowingly and voluntarily because she was never given proper notice of what those rights were. Sotomayor reversed the decision of the lower court and returned the case for a full hearing on all her claims.

Henry v. Champlain Enterprises, Inc., 445 F.3d 610 (2d Cir. 2006)
Participants in an Employee Stock Ownership Plan (ESOP) sued U.S. Trust, the plan fiduciary for violating ERISA in connection with the sale of stock to the ESOP. It was alleged that U.S. Trust violated its fiduciary duty to ESOP participants by failing to ensure that a fair price was paid for the stock. The district court found that U.S. Trust violated its fiduciary duty under ERISA and awarded damages. Sotomayor reversed.

The district court found that U.S. Trust failed to produce sufficient documentation of the investigation it undertook in the months leading up to the sale of the stock. According to Sotomayor, however, the detailed notes taken on behalf of U.S. Trust at a key meeting indicated that U.S. Trust had acted with prudence and gave rise to a strong inference that critical issues had been addressed by U.S. Trust before the sale of the stock.

Conceding that various issues needed to be reconsidered by the lower court, Sotomayor set aside the district court’s judgment and damages award and sent the case back to the district court for further consideration.

In re Bethlehem Steel Corporation, 479 F.3d 167 (2d Cir. 2007)
This case isn’t a true ERISA case. It involves a severance payment (which can be part of an ERISA plan), but in this case, the holding of the court is based on bankruptcy law instead of ERISA. This section seemed to be the most appropriate place for a discussion of this case to appear.

An employee was terminated while his employer’s bankruptcy was pending. He claimed that severance or early retirement payments he was owed should be treated as an administrative claim. Administrative claims involve expenses that are “actual, necessary costs and expenses of preserving the [bankruptcy] estate, including wages, salaries, and commissions for services rendered after the commencement of the case.” Adminstrative expenses must be paid in full.

According to Sotomayor, in determining whether the employee’s severance or retirement payment could be considered an administrative expense, the key inquiry is whether it represents a new benefit earned at termination or an acceleration of a benefit the employee earned over the course of his employment. If the latter, the payment wouldn’t be an administrative expense.

Sotomayor ruled that the employee’s claim in this case was not an administrative one. The fact that it was labeled as severance or retirement benefits wasn’t determinative. The payment in question had nothing to do with keeping the business going after the commencement of the bankruptcy.

Analysis of Sotomayor’s Decisions on ERISA
If there’s any conclusion to be drawn from Sotomayor’s ERISA decisions while a judge on the Second Circuit Court of Appeals, it’s that she looks carefully at the facts of each case and the section of ERISA applicable to those facts. While she has gained considerable experience in a complicated area of the law, it’s impossible to put Sotomayor in one box or another when it comes to ERISA. That’s probably a good thing, as our present economy makes it increasingly likely that the retirements benefits of millions of employees hang in the balance of judicial interpretations of ERISA.

This concludes my review of Judge Sotomayor’s decisions as a district judge and as a judge on the Second Circuit Court of Appeals. I will continue to put up regular posts on Sotomayor as we move closer to her confirmation hearings.

1. 

   Sewell says:

   July 18, 2009 at 9:10 pm

   Here are two questions of great importance to physicians to be posed to Judge Sotomayor:

   When a plaintiff brings a complaint to the federal courts on the basis of a defendant’s breach of a Federal Law, and obtains a ruling that is based entirely upon a determination of whether the actions resulting in breach are consistent with an applied legal standard, without consideration of evidence and testimony affecting the violated statute, is the role of the appellate court merely to test the appropriateness of the application of the legal standard?

   Does the United States Supreme Court have a role in providing guidance in matters of this kind when presented?

   BACKGROUND CASE

   United States Court of Appeals
   SECOND CIRCUIT

   Clinton Sewell, MD and Caricare Medical Services, PC
   Docket No: 05-6096-cv
   v.

   The 1199 National Benefit Fund for Health and Human Services

   RELEVANT SECTIONS OF THE RULING

   6a
   II
   ERISA section 502 provides that a “civil action may be brought by a participant or beneficiary to recover benefits due to him under the terms of his plan.” 29 U.S.C. Section 1132(a)(1)(B). Although section 1132(a)(1)(B) grants only plan beneficiaries or participants standing to bring a civil action to recover plan benefits, we have recognized a narrow exception that grants healthcare providers standing provided that a beneficiary has assigned to the provider his claim in exchange for healthcare services ..…………………………………………………………………………………………………… Here, Sewell alleged in his complaint that he was an assignee of benefits under the Plan and that therefore had a claim under ERISA against the Fund. ……………………………………………………………………………………………………………………We, therefore turn to the merits.

   7a

   The parties agree that we must review the Fund’s denial of benefits under an arbitrary and capricious standard because the benefit plan gives the administrator discretionary authority both to determine eligibility for benefits and to construe the terms of the plan………………………………………………………………………………
   ………………….Because the District Court’s determination that the Fund’s decisions were not arbitrary and capricious is a legal conclusion, we review that determination de novo. ………………………………………………………….

   9a

   …………………………………………………………………………………………………….Returning to the merits of the case, we conclude that Sewell has failed to show that the Fund acted unreasonably in determining that he over-billed for the services he provided. ……………….

   COMMENTS

   Despite the fact that the Sotomayor appellate court acknowledged that Sewell had standing under ERISA, Sewell’s complaint that the Fund refused to provide a full and fair review of the denied benefits was not addressed by the court. Such refusal by the Fund is a blatant violation of federal law. Instead, the court chose to only address Sewell’s complaint regarding the methodology applied by the Fund in effecting the denials of benefits, and whether these actions met a technical legal standard.

   QUUESTION: Does the action of the court in this instance represent the protection of a corporate interest?
2. 

   John Phillips says:

   July 19, 2009 at 10:02 am

   Sewell,

   I don’t think either question was asked. If these questions had been asked, they wouldn’t have been answered except in the most general way.

   Thanks for weighing in.

   John