June 06, 2011
On May 16, 2011, the U.S. Supreme Court issued CIGNA Corp. v. Amara, —S.Ct.—, 2011 WL 1832824 (2011), a decision much anticipated by the ERISA litigation bar and ERISA plan fiduciaries. While the full impact of Amara on circuit precedent will not be known for some time, the case addresses a number of longstanding and significant issues that frequently arise in ERISA litigation. In particular, the Court addressed the scope of two of ERISA's remedial provisions, §§502(a)(1)(B) and 502(a)(3).
Parties frequently litigate the scope of these two remedial provisions because §502(a)(1)(B) allows for monetary relief, but restricts the claims that may be brought under that section to claims for benefits under the terms of the plan, whereas §502(a)(3) allows for plaintiffs to sue for a broader set of wrongs, but provides for "appropriate equitable relief" only, which the Supreme Court, in a series of cases, has narrowly circumscribed. Three of the most notable holdings by the Amara Court are as follows:
• ERISA §502(a)(1)(B), which authorizes participants to assert claims for payment of benefits under the terms of the plan, allows a court to enforce a benefit plan as written, but does not permit a court to reform the terms of the plan, even to remedy violations of other provisions of ERISA;
• Summary plan descriptions, and other summaries of ERISA plans, are not part of the "plan," and, therefore, their terms cannot be enforced under ERISA §502(a)(1)(B); and
• Courts cannot award relief under ERISA §502(a)(3) for "appropriate equitable relief" based on a finding of "likely harm" to a class of plan participants; rather, the court may award relief only to participants who have demonstrated causation and actual harm.
In this article, we summarize Amara, and offer our observations as to the impact of the case on circuit precedent.
Prior to 1998, CIGNA Corporation sponsored a traditional defined benefit pension plan for its employees, which provided retired employees with an annuity based on salary and length of service. Id. at *1. In 1998, CIGNA converted the plan into a cash balance plan, under which retiring employees would receive a lump-sum cash payment calculated based on a specified annual contribution from CIGNA, increased by compound interest. Id.
CIGNA announced the creation of the new plan to its employees in late 1997 in a newsletter. Id. at *4. CIGNA stated that the converted plan would "significantly enhance" the "retirement program," would produce "an overall improvement in…retirement benefits," and would provide "the same benefit security" with "steadier benefit growth." Id. at *5. In order to prevent employees from losing benefits they had accrued prior to 1998, CIGNA promised to make an initial contribution to each employee's plan account equal to the value of that employee's already earned benefits. Id. at *4. CIGNA informed employees that this initial deposit "represent[ed] the full value of the benefit [they] earned for service before 1998," and that "[o]ne advantage the company will not get from the retirement program change is cost savings." Id. at *5 (emphasis and alterations in original).
A group of plan participants challenged CIGNA's adoption of the new plan, alleging that the converted plan reduced their previously accrued benefits and that CIGNA had misrepresented the plan in its communications to participants. Id. at *1. The participants sought to have the plan reformed to provide the greater level of benefits to which the participants claimed they were entitled based on CIGNA's descriptions of the plan.
The U.S. District Court for the District of Connecticut found that in contrast to CIGNA's statements to its employees, the plan in fact saved CIGNA $10 million annually, the initial deposit did not represent the full value of earned benefits, and the new plan made some employees worse off. Id. at *5. The district court further found that certain of CIGNA's communications regarding the new plan were "significantly incomplete and misled its employees." Amara v. CIGNA Corp., 534 F.Supp.2d 288 (D. Conn. 2008).
Moreover, the district court found that CIGNA's initial contribution, which CIGNA told employees was equal to accrued benefits under the old plan, disadvantaged some employees in certain respects. For example, under the new plan, employees, rather than CIGNA, bore the risk of reduced benefits as a result of declining interest rates in the future.
Accordingly, as a result of the disclosures that the district court found misleading, the district court found that CIGNA violated ERISA §204(h), which requires notice of a reduction in future pension benefits, and ERISA's disclosure obligations set forth in §§102(a) and 104(b). The district court did not, however, require each plan participant to show that he or she had been harmed as a result of CIGNA's misleading disclosures. Rather, the district court held that class-wide relief was appropriate because there was "likely harm" suffered by class members. As relief, the district court reformed the plan's guarantee to change it from the greater of (A) the amount to which participants would have been entitled as of Jan. 1, 1998 under the old plan, or (B) the amount in their accounts at retirement, to the sum of (A) and (B). Amara v. CIGNA Corp., 559 F.Supp.2d 192 (D. Conn. 2008).
CIGNA appealed the district court's ruling to the U.S. Court of Appeals for the Second Circuit, which affirmed the district court's judgment for the reasons stated by the district court. Amara v. CIGNA Corp., 2009 WL 3199061 (2d Cir. Oct. 6, 2009).
Supreme Court Decision
The Supreme Court reversed and remanded. In a unanimous opinion, the Supreme Court held that ERISA §502(a)(1)(B), the remedial provision upon which the district court relied to reform the terms of the plan, did not authorize such relief. 2011 WL 1832824, at *3. ERISA §502(a)(1)(B) authorizes a participant or beneficiary to bring "a civil action" to "recover benefits due to him under the terms of his plan." 29 U.S.C. §1132(a)(1)(B). This provision speaks of "'enforc[ing]' the 'terms of the plan,' not of changing them." 2011 WL 1832824, at *10 (emphasis and alterations in original). Thus, the Court held that ERISA §502(a)(1)(B) does not permit a court to reform the terms of the plan.
The Court also rejected the Solicitor General's alternative justification for the district court's reliance on §502(a)(1)(B). The Solicitor General argued in an amicus brief that the district court correctly enforced the plan's terms as written because the "plan" includes the disclosures that constituted the summary plan descriptions. Id. The Supreme Court held that even if the district court had viewed the summaries as "plan" terms (which it did not), the terms of plan summaries cannot be enforced under §502(a)(1)(B) as the terms of the plan itself for three reasons.
First, the "syntax" of ERISA §102(a), which requires plan administrators to furnish summary plan descriptions advising participants of their rights and obligations "under the plan," "suggests that information about the plan provided by those disclosures is not itself part of the plan." Id. at *10 (emphasis in original). Second, the statute carefully divides authority between the plan's sponsor and the plan's administrator, and provides that the sponsor, like a trust's settlor, creates the basic terms of and conditions of the plan and executes a written instrument memorializing those terms, whereas the administrator, "a trustee-like fiduciary, manages the plan, follows its terms in doing so, and provides participants with the summary documents that describe the plan (and modification) in readily understandable form." Id.
The statute "carefully distinguishes these roles," and the Court found "no reason to believe that the statute intends to mix the responsibilities by giving the administrator the power to set plan terms indirectly by including them in the summary plan descriptions." Id. Finally, the Court found the Solicitor General's interpretation inconsistent with the purpose of a summary plan description: "clear, simple communication." Id. The Court reasoned that "[t]o make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers," which might "bring about complexity that would defeat the fundamental purpose of the summaries." Id.
As a result, the Supreme Court vacated the opinions below and remanded to the district court to "revisit its determination of an appropriate remedy for the violations of ERISA it identified." Id. at *15. Although the district court had not determined whether relief might be available under ERISA §502(a)(3), a majority of the Court went on to consider whether the relief ordered by the district court under §502(a)(1)(B) might be available under §502(a)(3). Id. at *11. That provision allows a participant, beneficiary, or fiduciary "to obtain other appropriate equitable relief" to redress violations of ERISA "or the terms of the plan." 29 U.S.C. §1132(a)(3).
The Court observed that the remedies ordered by the district court may be regarded as reformation of the terms of the plan to remedy the disclosure violations, estoppel to hold CIGNA to what it had promised, and an injunction for the fiduciary to pay already retired beneficiaries money owed under the plan as reformed. Id. at *12. A majority of the Court believed that each of these remedies was traditionally available in equity, and thus "within the scope of the term 'appropriate equitable relief' in Section 502(a)(3)." Id.
Despite the fact that the injunction required the plan administrator to pay money to retired beneficiaries, the majority did not believe this would render the relief unavailable under §502(a)(3). Id. The majority stated that equity courts traditionally had the power to award the remedy of surcharge, i.e., monetary compensation for a loss resulting from a trustee's breach of duty or to prevent the trustee's unjust enrichment. Id. at *13.
The Court distinguished the instant case from Mertens v. Hewitt Associates, 508 U.S. 248, 253 (1993), in which the Court held that the "compensatory damages" sought by the plaintiff was not "appropriate equitable relief" available under §502(a)(3). Whereas in Mertens, the defendant was a non-fiduciary third-party actuary, the defendant in the instant case (the plan administrator) was a fiduciary, and thus analogous to a trustee. This, a majority of the Court noted, made "a critical difference," and brought the remedy within the realm of remedies traditionally available in equity. Id. at *13. The majority took care to state, however, that the Court was not deciding "which remedies are appropriate on the facts of this case," and it will be for the district court to determine on remand whether to exercise its discretion to impose any remedy under §502(a)(3). Id. at *14.
Justices Antonin Scalia and Clarence Thomas did not join in the portion of the opinion dealing with the availability of relief under §502(a)(3). Instead, they issued a concurring opinion, criticizing the majority for exceeding the scope of the district court's ruling and addressing a question that the district court expressly had declined to address. Id. at *16. Because the question of the availability of relief under §502(a)(3) had not been addressed below, and was not, therefore, properly before the Court on appeal, Justices Scalia and Thomas characterized the majority's opinion on the availability of relief under §502(a)(3) and Mertens as "purely dicta, binding upon neither us nor the District Court." Id. at *17.
Finally, the majority analyzed the appropriate legal standard for determining whether members of the relevant employee class were injured. Id. at *14. As neither ERISA's disclosure provisions nor ERISA §502(a)(3) set forth a standard for determining harm from defective disclosures, the Court looked to the law of equity. Id. The Court found that it was necessary to show detrimental reliance for the remedy of estoppel, but not for other equitable remedies, such as surcharge. Id. at *15. Even where detrimental reliance was not required, however, it was always necessary to show actual harm, which may "sometimes consist of detrimental reliance, but…might also come from the loss of a right protected by ERISA or its trust-law antecedents." Id. Thus, the Court held that to obtain relief by surcharge for violations of ERISA's disclosure provisions, each plan participant must show actual harm and causation, which may or may not involve a showing of detrimental reliance. Id.
Impact of 'Amara'
The Supreme Court's ruling in Amara is significant for at least four reasons.
First, the Supreme Court's ruling that ERISA §502(a)(1)(B) allows a court to enforce the plan only as written, and does not permit a court to reform the terms of the plan, appears to resolve a circuit split. Most circuits have held that the text of ERISA §502(a)(1)(B) limits claims under the section to claims for benefits "under the terms of the plan," and participants may not assert claims for statutory violations of ERISA (i.e., that the terms of the plan are illegal) under §502(a)(1)(B) in the absence of an entitlement to benefits under the terms of the plan as written. See Eichorn v. AT&T Corp., 484 F.3d 644, 652 (3d Cir. 2007); Anderson v. Consolidated Rail Corp., 297 F.3d 242, 252 (3d Cir. 2002); Carrabba v. Randalls Food Markets, 252 F.3d 721 (5th Cir. 2001); Ross v. Rail Car Am. Group Disability Income Plan, 285 F.3d 735, 739-40 (8th Cir. 2002).
In 2007, however, the U.S. Court of Appeals for the Sixth Circuit had permitted a claim based on a statutory violation of ERISA under ERISA §502(a)(1)(B), on a theory that ERISA's requirements are "implied" terms of any employee benefit plan, West v. AK Steel Corp. Ret. Accumulation Pension Plan, 484 F.3d 395, 405 (6th Cir. 2007), and the Supreme Court denied certiorari. AK Steel Corp. Retirement Accumulation Pension Plan v. West, 129 S. Ct. 895 (Jan. 12, 2009). The Supreme Court's holding in Amara that §502(a)(1)(B) does not permit a court to alter the terms of the plan, even where the court has determined that statutory violations have been committed, appears to resolve the circuit split created by the AK Steel case.
Second, prior to Amara, some lower courts had held that a plan sponsor was obligated to provide the level of benefits set forth in the summary plan description, even if the summary plan description erroneously described more generous benefits than those provided pursuant to the plan document. The Supreme Court's ruling in Amara appears to foreclose such arguments, and should give some comfort to plan sponsors struggling to describe often lengthy and complex plan provisions in a succinct and straightforward manner in plan summaries.
Third, the Court's ruling that demonstrating "likely harm" on a class-wide basis is not sufficient appears to have raised the bar for the showing that a class of participants must make to obtain relief. Where a participant is seeking a remedy tantamount to estoppel, the participant must establish detrimental reliance, which frequently may preclude class certification because reliance typically raises individualized issues of fact. Even where participants seek other types of equitable relief, participants will need to show actual injury and causation on an individual basis.
Finally, there likely will be further litigation over the scope of relief available under ERISA §502(a)(3) against plan fiduciaries, in light of the majority opinion in Amara. Defendants can be expected to argue that, as noted by Justices Scalia and Thomas in their concurrence, the majority's discussion of relief under §502(a)(3) is dicta and is not binding on lower courts.
This article appeared in the June 6, 2011, New York Law Journal.
This article is reprinted with permission of the June 6, 2011 issue of the New York Law Journal. © 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
This item also appeared in the May-June 2011 Employer Update.