Jun 26, 2017

The Supreme Court Tackles Conflicts of Interest


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11/17/2008
Brian S. King
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Last week the Supreme Court granted certiorari in MetLife v. Glenn. I’m late to the game on commenting about that action but you can read Roy Harmon’s thoughts here and Prof. Paul Secunda’s comments here. You can read about my comments when Glenn was first decided by the U.S. Court of Appeals for the Sixth Circuit here.

What’s amazing to me is that it has been almost twenty years since the Supreme Court ruled on the appropriate standard of review for ERISA benefit cases and Glenn will be the first significant action by the Court since then on this key issue in ERISA litigation. Since 1989, when the Supremes decided Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), there have been literally thousands of ERISA benefit claims decided in which courts have struggled with how to handle the standard of review for a discretion-granted fiduciary who is operating under a conflict of interest. Until now, the Supreme Court has steadfastly refused to clarify what only can be characterized as a complete jurisprudential mess. Don’t ask me why the delay.

This case is huge. The question before the court is: "[i]f an administrator that both determines and pays claims under an ERISA plan is deemed to be operating under a conflict of interest, how should that conflict be taken into account on judicial review of a discretionary benefit determination?" The Court has to answer two questions. I’m not sure it will get past the first one, whether acting as both decider and payer of a claim creates a conflict of interest courts must take into account. The answer seems self-evident. What could be more of an obvious conflict of interest than for the company that is going to have to pay the claim is also the company charged with making the decision about whether the claim should be paid?

But in ERISAland, a close cousin to Alice’s Wonderland, things are rarely as straightforward as they appear. Many courts across the country have, in panglossian fashion, held that there is no good reason not to trust insurance companies and benefit committees of large employers sponsoring self funded plans. After all, they want happy customers and employees, don’t they? ‘Nuff said, no cognizable conflict exists according to that line of cases.  Those folks need to read my post from yesterday about Allstate.

My prediction is that four jurists, Chief Justice Roberts, Justice Scalia, Justice Thomas and Justice Alito, will buy off on this argument. But they will lose Justice Kennedy, whose pragmatic approach and need to acknowledge how the real world works will cause him to go with the other four members of the Court in ruling that this conflict of interest is simply too clear and significant to ignore.

On the second issue, how the conflict must be taken into account, two approaches lead the field. The first, and the one that most Circuits have adopted, is the sliding scale analysis. This framework calls for courts to, on a case by case basis, adjust the deference they show based on the degree of the conflict. The problem with this approach is its virtue: a lack of predictability that arises from taking into account the individual circumstances of each case.

The second approach is to shift the burden to the conflicted ERISA fiduciary to demonstrate that its decision was justified under the terms of the ERISA plan. This burden shifting is more straightforward and gives the parties greater ability to predict how a court will deal with a conflict. My hope is that, if the court reaches the second issue in the case, it adopts some sort of burden shifting approach. The sliding scale analysis is pretty much unworkable in application. If the Court does go with the sliding scale, it will need to flesh that approach out by identifying a number of specific factors courts must take into account in determining how much deference judges must show a conflicted ERISA fiduciary.



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1 Comments to "The Supreme Court Tackles Conflicts of Interest"

Timing is everything in life, including bad timing. I am, at once, delighted and disturbed to read your entry. Just yesterday, I spent at least 12 hours trying to read and understand Langbein's Law Review article of 2006. To test myself, I posted the included comment on a legal forum. I was hoping someone would comment on how close I got. I was going to check my notes because I forgot how to spell his name. Then I see there is a link right next to where I'm typing. but I don't wan to hit any of your links because I'm afraid it might change my opinion; and I'm getting a headache from forming opinions lately. Anyway, here it goes:

ERISA Comment

With one stroke of the pen, the Supreme Court, in Bruch v. Firestone, effectively and severely limited judicial discretionary power to weigh any real or potential conflict of interest in determining the level of deference to give to a fiduciary, when examining an alleged abuse of discretion by said fiduciary. The claimant must that the abuse rises to the "arbitrary and capricious" or "off-the-wall" threshold, a heavy burden indeed. Even then, punitive damages are prohibited. Circuits are not given enough guidance and must forge their own, and sometimes, divergent paths.
Bruch incentivizes misconduct.

We need better Supreme Court Justices. I think my headache's getting worse.
Posted by Steven L Joffe on November 17, 2008 at 01:47 PM

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