I really love Chicago. But I’m glad I don’t live there. Or, for that matter, anywhere in the three states that are governed by legal precedent from the U.S. Court of Appeals for the Seventh Circuit. You see, for the most part, I make a living representing folks whose ERISA claims have been denied. When I help them get their claim denials reversed, I get paid a percentage of their recovery. When I can’t get those denials reversed, I don’t get paid anything.

It’s difficult to make a living representing ERISA claimants anywhere in the country. But it’s especially difficult in the Seventh Circuit. A case handed down last week, Williams v. The Interpublic Severance Pay Plan, ___ F.3d ___ (7th Cir. 2008), 2008 U.S. App. LEXIS 9231, illustrates why. You can find a link to the case at the Workplace Prof blog here.

Mark Williams claimed the right to enhanced severance plan benefits of the company he worked for was sold. If the buyer of his company failed to offer him a position "comparable" to his position with the old company, he would get those enhanced severance benefits. He argued that he failed to receive a comparable position with the new company but his new employer denied his claim. He appealed and the trial court, providing a deferential review of the decision, determined that the denial was not arbitrary and capricious and ruled against Williams. He appealed. The Seventh Circuit affirmed. From the face of the ruling, I’m not sure I disagree with the decision on the merits. But the affirmance isn’t the problem. It’s the analysis the Seventh Circuit sets forth in discussing how the federal judiciary should review ERISA benefit denials. That analysis, for all practical purposes, precludes meaningful judicial review of an adverse decision against a claimant.

Williams argued that the ERISA plan administrators had a significant conflict of interest. The source of the severance benefit funds was the company who sponsored the plan. The company also was the entity charged with deciding whether Williams had a valid claim. If it decided Williams’ claim in his favor, every dollar Williams was paid would come from the company’s bottom line. Not insensibly, Williams argued that this obvious, structural conflict of interest required a federal judge to show less deference to the decision than would ordinarily be given to a plan administrator vested with unfettered discretion to determine eligibility for benefits and interpret the terms of the ERISA plan.

From Williams’ perspective, getting a federal judge to scrutinize an ERISA plan administrator’s denial more closely than they ordinarily would under an arbitrary and capricious standard of review is critical. This is because if you are an ERISA plan administrator vested with discretion, just about any decision you make with an undiluted arbitrary and capricious standard of review is bullet proof. It won’t be overturned by a federal court in all but the most extreme circumstances. As put by one well-known Seventh Circuit jurist, "although it is an overstatement to say that a decision is not arbitrary or capricious whenever a court can review the reasons stated for the decision without a loud guffaw, it is not much of an overstatement." Pokratz v. Jones Dairy Farm, 771 F.3d 206 (7th Cir. 1985) (Easterbrook, J.).

The Seventh Circuit discusses how to handle this obvious conflict of interest in a manner that, to say the least, is unpersuasive to me. The court’s analysis relies, in large part, on this language:

Rarely is a pension or welfare plan’s administrator a person whose own welfare is at stake. Administrators commonly are large organizations, and the real people who make decisions on its behalf are no more interested in the outcome than federal judges are "interested" in the resolution of a tax case. True, judges’ salaries won’t be paid if taxes can’t be collected, but the effect of any one case on federal finances is so small that the judge does not care who prevails. Just so with the people who act on requests for pension or welfare benefits. Corporations often find it hard to align employees’ incentives with stockholders’ interests; they use stock options, bonuses, piece rates, and other devices Administrators usually don’t try.

Noteworthy is the fact that there are no citations to any authority, whether case law, treatises or otherwise, for any of these statements. In fact, the analogy of insurers or employers funding ERISA plans to federal judges deciding tax cases is wildly inaccurate.

The case closest to supporting the Williams’analysis, Perlman v. Swiss Bank Corp., 195 F.3d 975 (7th Cir. 1999), actually demonstrates the weakness of the court’s thinking. In Perlman, UNUM Life Ins. Co. denied a disability claim. Commenting on whether UNUM’s status as both plan administrator and payer of benefits constituted a conflict of interest that required something less than a complete arbitrary and capricious standard of review by the Seventh Circuit, the court used the same federal-judge-deciding-a-tax-case analogy. But apparently, little attention was paid by the Seventh Circuit judges on the Williams panel to circumstances involving UNUM after Perlman was issued in 1999. Those events quite clearly demonstrate that the entire premise of the conflict of interest analysis, that insurers have no interest in the outcome of their claim determinations, is completely erroneous.

UNUM was involved in one of the most significant acts of premeditated insurer wrongdoing uncovered in recent years. See, for example, here, herehere and here for information. Given the systemic culpable behavior by the very company Perlman holds up as an example of insurance company purity, shouldn’t it have been evident that the federal-judge-in-a-tax-case analogy is risibly wrong? Even without the evidence of UNUM’s self-interested actions that resulted in ripping off its insureds, the idea that an insurer approaches its job of evaluating claims in the same way that a federal judge approaches his or her job is a serious slap in the face to a conscientious jurist.

This obvious flaw in the Williams and Perlman analysis just scratches the surface of how far off base the Seventh Circuit is on this point. There are other, more fundamental, problems. For example, the decision makes no reference to the core of an ERISA decision-maker’s framework for acting with discretion: ERISA’s fiduciary duties. Those duties, "the highest known to the law," require complete loyalty and fidelity to the interests of the ERISA plan participants and beneficiaries.  La Scala v. Scrufari, 479 F.3d 213, 219 (2nd Cir. 2007).  "There is no balancing of interests; ERISA commands undivided loyalty to the plan participants." McGraw v. Prudential Ins. Co., 137 F.3d 1253, 1263 (10th Cir. 1998).  Those fiduciaries must also act with the care, skill, prudence and diligence that an experienced and conscientious ERISA fiduciary would apply to the situation. Finally, ERISA fiduciaries must carry out the dictates of the terms of the ERISA plan. Though these duties must guide all aspects of an ERISA fiduciary’s activities, the decisions in Williams and Perlman make no reference whatsoever to them.

In contrast, an officer, agent or employee of a for-profit insurer or other company has a duty, a competing fiduciary obligation, to the company’s shareholders to maximize their return on their investment. This reflects basic principles of corporate law. Failing to carry out these responsibilities to enhance the profit of the company can, at the very least, get you fired. Lawsuits alleging that corporate officers or other agents have violated this duty to the shareholders are common. This is as it should be. We all recognize in our market economy the need for businesses to compete successfully. And it is second nature to any individual with any experience in the business world that considerations other than making sure the bottom line is black rather than red, that the company is operating at a profit rather than a loss, must take a back seat. Otherwise, the company will, perhaps quite quickly, cease to exist.

These competing fiduciary duties are quite different than the obligations a federal judge has in deciding any case. A judge’s obligation is to correctly decide, with no bias or favoritism, and in accordance with the law and the Constitution, the disputes that come before her. To the extent there are conflicts that threaten to compromise her ability to adjudicate fairly and impartially, she must recuse herself from the case.

There is no discussion or recognition of any of these basic principles in either Williams or Perlman. This is especially puzzling since both were written by Frank Easterbrook, whose standing and reputation in the federal judiciary is built largely on his prowess in applying the economic analysis of law to his work as a jurist. However, Williams and Perlman, with their superficial and erroneous analysis, are striking examples of Judge Easterbrook missing the mark by a long way.

Reading Williams and Perlman together nearly completely insulates insurers (or other companies acting both as payors of ERISA benefits and decision-makers about who is entitled to receive those benefits) from any meaningful judicial review of claim denials. You are an insurance company issuing group policies for ERISA plans. You know that by inserting a boilerplate sentence in your policy your claim denials will not be overturned unless your rationale elicits a "loud guffaw" from a federal judge. You get aggressive in denying all but the most clear-cut claims. When sued, you hire smart lawyers who can create an aura of "well, the claim denial wasn’t completely unreasonable" around your decision. You are effectively untouchable.

It doesn’t take a genius to figure out what happens where a person or entity knows there will be no accountability for their wrongdoing. Lack of accountability is a guarantee of purely self-interested behavior regardless of what losses their actions cause others. We have learned by sad experience that almost all individuals or entities who gain disproportionate levels of authority will quickly abuse their power. The more complete the authority and the longer it is held, the more likely and widespread is the abuse.

This is how ERISA works in the hands of this Seventh Circuit panel. Unfortunately, many other jurists across the country agree wholeheartedly.

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Don Levit 11/17/2008 01:47 PM
Brian: This article reminds me of several class action cases, in which the insurers were fined hundreds of millions of dollars. Typically, the suit was based on premium overcharges, where the average refund for each participant was around $200. So, small numbers can add up to big "windfall" profits. While we are discussing conflicts of interest, I am curious if you are aware of any court cases in which the conflicts of the claimant, and even of his attorney, were discussed? The claimant is "biased" in that he needs the treatment, and desires it to be paid. The attorney is "biased," for he gets paid only if the claimant wins. Don Levit
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Brian S. King 11/17/2008 01:47 PM
Your comments bring to mind language from the Supreme Court in Black & Decker v. Nord. In that case the question was whether the opinions of treating physicians of a claimant for disability benefits should be given weight over the opinions of a non-treating physician hired by the insurance company. The Court stated that both the reviewing physician and the treating physician might have motives to shade their opinions. The Court refused to provide a per se rule favoring the opinions of treating physicians. And, of course, judges implicitly or explicitly will take into account the credibility (or lack) of the claimant. As for the lawyers handling the case, they aren't in a position to provide facts on which the claim is evaluated. They argue the facts as they find them. That's not to say that the credibility (or lack) of the claimant's attorney doesn't matter. But the effect is blunted quite a bit compared to the credibility of the physicians and the claimant.
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