The U.S. Supreme Court has agreed to review the decision of the Second
Circuit Court of Appeals in Frommert v. Conkright, 535 F.3d 111 (2d Cir.
2008). At issue is the degree of deference courts should accord the decision of
the administrator of a plan subject to ERISA that is made outside the context of
an administrative claim for benefits. The Supreme Court will also consider what
standard an appellate court should use in reviewing a lower court’s
interpretation of an ERISA plan’s terms.
The case will be argued during the Supreme Court’s upcoming October term.
The plaintiffs in Frommert were former Xerox Corporation employees who
were participants in a Xerox pension plan. They had previously terminated their
employment with Xerox and received lump-sum distributions of their accrued
pension benefits. Some time later, Xerox rehired the plaintiffs. They rejoined
the plan and were credited with all their prior years of service to Xerox. Their
employment was later terminated again.
The Xerox pension plan provided that when a prior distribution of benefits
had been made to a participant, any subsequent distribution had to be offset by
the accrued benefit attributable to the prior distribution. The plan
administrator was granted broad discretionary authority to interpret the plan
and resolve ambiguities. The plan administrator calculated plaintiffs’ benefits
following the second termination of their employment using an offset formula
based on a “phantom account” to reflect their prior pension distributions. The
plaintiffs objected, and ultimately filed suit against the plan and the current
and former plan administrators.
The district court upheld the plan administrator’s calculations and the
plaintiffs appealed. The Second Circuit reversed, holding that: (1) the phantom
account formula was a “retroactive cut-back” of benefits, contrary to Section
204(g) of ERISA; and (2) employees were not given proper notice of the phantom
account formula in early versions of the summary plan description. The Second
Circuit directed the lower court to determine the plaintiffs’ benefits without
using the phantom account.
On remand to the district court, the plan administrator asserted that in
order to avoid paying duplicate benefits to the plaintiffs, the pension plan
should be interpreted to require that the benefits payable to each plaintiff
following his or her second termination be offset by the present-day economic
value (the actuarial equivalent) of the prior distribution. The district court
disagreed, and held that the offset should be based on only the actual amount of
each prior distribution, without regard to the time value of money dating back
to the time of such distribution. This time, the defendants appealed and the
Second Circuit affirmed, ruling that: (1) the district court did not need to
defer to the plan administrator’s interpretation of the pension plan; and (2)
the district court had “discretion” to fashion a remedy based on the lower
court’s own interpretation of the plan. The Supreme Court will review this
second decision of the Second Circuit.
Deference to Plan Administrator
The first issue that the Supreme Court will consider in Frommert is
whether a court is obligated to defer to a plan administrator’s reasonable
interpretation of plan terms if the administrator arrived at its interpretation
outside the context of an administrative claim for benefits.
In Metropolitan Life Ins. Co. v. Glenn, 123 S. Ct. 2343 (2008), the
Supreme Court reiterated its holding in Firestone Tire & Rubber Co. v. Bruch,
489 U.S. 101 (1989), that courts should review a denial of plan benefits under a
de novo standard, giving no deference to the plan administrator’s
decision, unless plan documents grant the administrator discretionary authority.
In Frommert, the Second Circuit held that the district court had no
obligation to defer to what it characterized as the mere “opinion” of the Xerox
plan administrator. Thus, the court of appeals effectively carved out an
exception to Firestone (i.e., no deference is to be accorded to a plan
administrator’s interpretation of plan provisions when made outside the course
of an administrative benefit determination).
In contrast to the Second Circuit’s approach in Frommert, the Ninth
Circuit upheld the method for calculating rehired Xerox employees’ pension
benefits that the Xerox plan administrator sought to use in Frommert. (See
Miller v. Xerox Corp. Retirement Income Guarantee Plan, 464 F.3d 871 (9th
Cir. 2006)). Frommert, therefore, illustrates how depriving plan
administrators of the benefits of Firestone deference exposes them to the
risk of conflicting benefit plan interpretations.
Proper Standard for Appellate Review in Calculating Plan Benefits
The Supreme Court will also consider whether the Second Circuit erred in
holding that a district court has “allowable discretion” to adopt any
“reasonable” interpretation of the terms of an ERISA plan when plan
interpretation is at issue. Ordinarily, appellate review of a lower court’s
interpretation of a written instrument is de novo (i.e., without
any deference to the lower court). The court of appeals in Frommert
reviewed the district court’s interpretation of the Xerox pension plan only to
determine whether the district court exceeded its allowable discretion in
crafting its chosen remedy. The Supreme Court must determine whether the
Frommert justify an exception to the ordinary rule of de novo
We will report on the Supreme Court’s decision in Frommert after it is
issued. In the meantime, if you have any questions, please contact the authors or any member of
Benefits or Labor &