No Do Overs in Litigation!
Congratulations are in order to my good friend and neighbor, Scott Hagen, for his success this week in Flinders v. Workforce Stabilization Plan of Phillips Petroleum Co., ___ F.3d ___, 2007 U.S. App. LEXIS 15879 (10th Cir. 2007).
Scott represented a group of employees of Phillips Petroleum who were denied benefits to be paid if the employees were laid off as a result of a merger. The merger occurred but the plan administrator denied the claims because it argued that, as unionized employees, the group was not entitled to receive benefits under the language of the summary plan description and the applicable collective bargaining agreement. After certifying the case as a class action, the district court agreed with the plan and threw out the employees out.
On appeal, the U.S. Court of Appeals for the Tenth Circuit reversed and ordered the benefits paid to the class members. The decision, written by Judge Paul J. Kelly, contains a number of interesting holdings.
First, the case discusses in detail the proper scope of review in ERISA cases. The plan documents in the case gave discretion to the plan administrator to interpret the terms of the plan and determine eligibility for benefits. This magic language triggered a very deferential standard of review for the court in litigation: the judges could reverse the denial only if it was an “arbitrary and capricious” decision. Along with a deferential standard of review, the scope of review, the evidence and arguments a court will consider in litigation, is restricted to only those presented and provided by the parties in the pre-litigation appeal process. In Flinders, the plan attempted, in litigation, to present a new argument for why the denial was proper. The Tenth Circuit rejected in no uncertain terms that attempt to buttress the record:
“. . . [w]e will not permit ERISA claimants denied the timely and specific explanation to which the law entitles them to be sandbagged by after-the-fact plan interpretations devised for purposes of litigation. . . . This is consistent with the converse rule that a claimant may not urge new grounds outside the administrative record that would support the award of benefits.”
Here we have an explicit acknowledgment, most welcome from my perspective, that what is good for the goose is good for the gander in terms of limiting the ability of parties to “do over” a flawed pre-litigation appeal process once they get to court. It’s been very clear that ERISA claimants are stuck with their pre-litigation appeal errors and omissions once they get to court. But the reverse has not always been so clear in ERISA caselaw.
If there is one thing to take away from Flinders it is a renewed appreciation for the importance of paying attention to the details of the pre-litigation appeals process when dealing with denied benefit claims in ERISA cases. If claimants find an experienced and skilled ERISA lawyer to help them in that pre-litigation process, they will often be able to do what is necessary, before suit is ever filed, to take gray area claims and make them strong and to take strong claims and make them near ironclad. It is here, more than in litigation, that claims are won or lost. Flinders highlights that fact. While ERISA plan administrators and fiduciaries should, and often do, have a much greater appreciation for the appeal process than the claimants, I am regularly surprised by how haphazard and incompetent they are in their pre-litigation work. I regularly see them fail to carry out a full, fair, thorough and non-adversarial claims procedure process.
The decision’s second point is that where plan administrators deny claims in the face of unambiguous language requiring payment of those claims, the denial is, by definition, arbitrary and capricious and must be reversed. This is one of those principles that is, to a large degree, self evident. Perhaps this is why it is hard to find cases with language that make this point explicitly! In any event, it is good to see Flinders state clearly this principle of law for ERISA benefit cases.
A final issue in the decision that is important deals with the remedy to which claimants are entitled when their benefits are wrongfully denied. I’ve blogged a number of times before (see here, here, here and here) about my irritation at the tendency of the federal judiciary to remand a case back to a plan administrator when they reverse a denial rather than simply ordering that the benefits be paid to the claimant.
All too often, the effect of remand is to give wayward plan administrators a second bite at the apple, a second chance for insurers or other payers bent on denying a claim a chance to make sure they carry out the all important pre-litigation appeal process correctly in terms of making their denial more bullet proof in litigation. Flinders makes clear that remand is only appropriate when there is additional factual spadework to be done. If, on the other hand, there are no facts to be developed, the questions before the court are purely matters of legal interpretation or the ERISA plan and its administrators make clear in litigation that they will maintain their denial regardless of how the facts are developed, remand is not appropriate. Rather, the district or appeals court should save everyone time and expense and simply award benefits to the claimants.