Supreme Court Bolsters Deferential Review of ERISA Plan Administrators' Decisions

April 22, 2010

Yesterday’s Supreme Court decision in Conkright v. Frommert, Docket No. 08-810 (U.S. April 21, 2010), confirmed the deference owed by courts to administrators of ERISA benefit plans where the plan documents confer discretionary authority on the plan administrator. Reversing the U.S. Court of Appeals for the 2nd Circuit, the Supreme Court held that a “single honest mistake in plan interpretation” did not strip a court of its obligation to defer to a plan administrator’s interpretation of plan terms.

In Conkright, the Supreme Court emphasized that ERISA principles require courts to afford ERISA plan administrators a broad standard of deference where plan documents grant them discretionary authority. See Metropolitan Life Ins. Co. v. Glenn, 554 U.S. ___ (2008); Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989).

Such deference, the Supreme Court reasoned, preserves the “careful balancing” between ensuring fair and prompt enforcement of benefit rights and encouraging employers to adopt benefit plans by promoting “efficiency, predictability, and uniformity” in plan administration. Conkright also makes clear that a plan administrator’s good-faith interpretations of plan documents are entitled to deference regardless of the procedural context in which the interpretations arise.

Background

The plaintiffs in Conkright were former Xerox Corporation employees who participated in a Xerox pension plan. They had previously terminated employment with Xerox and received lump-sum distributions of accrued pension benefits. After Xerox rehired the plaintiffs, they received credit for their prior years of service to Xerox.

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 documents granted the administrator broad discretionary authority to interpret the plan and resolve ambiguities. Consistent with an unwritten past practice, the plan administrator calculated the 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.

The district court upheld the plan administrator’s calculations and the plaintiffs appealed. The 2nd 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 2nd 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, holding 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, Xerox appealed, and the 2nd Circuit affirmed, ruling that: (1) the district court did not need to defer to the plan administrator’s reinterpretation 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. Xerox appealed the 2nd Circuit decision to the Supreme Court.

Deference to Plan Administrator

The Supreme Court reaffirmed that courts should defer to a plan administrator’s interpretation of plan documents, noting that deference is supported by the purposes of ERISA and by principles of trust law. Writing for the 5-3 majority, Chief Justice Roberts explained that the plan administrator’s initial error in interpreting the plan document’s offset provision was a “single honest mistake,” which did not destroy the deference owed to the plan administrator’s subsequent interpretation of that provision.

The Supreme Court rejected the 2nd Circuit’s view that interpretations made by a plan administrator in court proceedings or other contexts unrelated to benefit claims were “mere opinion[s]” not entitled to deference. The Supreme Court made clear that where the plan documents so provide, a plan administrator’s good-faith interpretation of plan documents is entitled to deference, regardless of the procedural context in which the interpretation arises.

Although the Supreme Court rejected the 2nd Circuit’s “one-strike-and-you’re-out” approach, the Supreme Court also cautioned that “multiple erroneous interpretations,” even if made in good faith, might cause an administrator to forfeit this deferential standard.

The plaintiffs and the Department of Labor, which filed an amicus brief supporting the plaintiffs, argued that requiring courts to defer to plan administrators who had made mistakes would encourage them to adopt unreasonable interpretations in the first instance and frustrate the purposes of ERISA. The Supreme Court described these concerns as “overblown,” noting that even under a deferential standard, the law only required deference to “reasonable” interpretations.

The Supreme Court reasoned that weakening ERISA’s deferential standard would contradict important purposes of ERISA by fostering unnecessary litigation and expense and “creat[ing] further complexity, adding time and expense to a process that may already be too costly for many.”

Conkright Reconciles Conflicting Decisions from 2nd and 9th Circuits

The Supreme Court noted that, contrary to the 2nd Circuit’s decision, the 9th Circuit had previously upheld Xerox’s method for calculating rehired Xerox employees’ pension benefits. (See Miller v. Xerox Corp. Retirement Income Guarantee Plan, 464 F.3d 871 (9th Cir. 2006)). The Supreme Court reasoned that failing to defer to the plan administrator could thus subject the Xerox plan to two conflicting instructions from two different courts regarding the same plan provisions.

In emphasizing the importance of uniformity, predictability and efficiency in ERISA plan administration, the Conkright majority cited prior Supreme Court ERISA preemption cases. This may foreshadow the majority’s view on whether ERISA preempts the San Francisco healthcare plan ordinance, an issue that the Supreme Court will address next term.

Dissent: Judges Should Be Free to Reject the Plan Administrator’s Interpretation

Justice Breyer, along with Justices Stevens and Ginsburg, dissented from the majority opinion, arguing that, although principles of trust law permit courts to defer to the trustee’s interpretation, they do not require such deference. The dissent criticized what it termed the majority’s “one free honest mistake” rule as impractical and encouraging litigation over what is “honest.”

Implications for ERISA Litigation Post-Conkright

Conkright seeks to discourage litigation and requires deference to a plan administrator’s reasonable interpretations of a plan as a means of promoting uniformity and efficiency in plan administration, with the goal of encouraging employers to adopt and maintain ERISA benefit plans. Although the facts in Conkright may be unique, the ERISA principles stressed by Chief Justice Roberts have important implications for other current issues in ERISA litigation, including not only ERISA preemption but also fiduciary litigation over plan fees and “stock drop” claims.

For More Information

To learn more about this case, please contact the authors or any member of the McGuireWoods Employee Benefits or Labor and Employment teams.

This legal update was included in the Profit Sharing/401k Council of America Executive Report on May 10, 2010.

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