CIGNA v. Amara: Supreme Court Addresses Remedies for Violation of ERISA Disclosure Rules

May 20, 2011

In CIGNA Corp. v. Amara, No. 09-804, 2011 U.S. LEXIS 3540 (U.S. May 16, 2011), the Supreme Court unanimously vacated a lower court’s class-wide award of additional pension benefits as a remedy for an employer’s failure to communicate the effects of CIGNA’s conversion of its traditional defined benefit (DB) pension plan to a cash balance plan.

In an opinion by Justice Breyer, the Supreme Court

  • ruled that ERISA §502(a)(1)(B), which allows a plan participant to sue for benefits due under the terms of the plan, did not authorize the lower court’s rewriting of the pension plan to provide more generous benefits consistent with the miscommunications concerning the terms and effects of the cash balance conversion;
  • rejected the amicus argument of the U.S. Department of Labor (DOL) that miscommunications in the plan’s summary plan description (SPD) were “terms of the plan” that could be enforced under ERISA §502(a)(1)(B);
  • remanded the case to the lower courts to fashion a proper remedy for the ERISA violations found by the lower courts; and
  • discussed, in abstract terms, the remedies that might be available under ERISA §502(a)(3), which allows a participant to sue to enjoin any act violating Title I of ERISA or to obtain “other appropriate equitable relief” to redress such violations.

ERISA Violations Found by District Court

Following a lengthy trial, the district court found that the employer’s description of its new cash balance plan was significantly incomplete and misled its employees by failing to inform them of the impact of the cash balance conversion on their pension benefits, including the “wear away” of benefits. Specifically, the district court found that the employer violated ERISA §204(h) (prohibiting amendments that significantly reduce future pension accruals without proper written notice to impacted individuals) and ERISA §§102(a) and 104(b) (requiring a plan administrator to provide SPDs that properly describe participants and beneficiaries of their benefit rights).

The district court presumed that the plaintiff class had suffered “likely harm” and that the employer had failed to introduce evidence to rebut the presumption. Accordingly, the district court ordered that the pension plan be rewritten to provide all members of the class with more generous benefits, consistent with the miscommunications by the employer.

In the Supreme Court, the employer did not dispute that the cash balance conversion disclosures violated ERISA. The issue for the Supreme Court was the proper remedy for these ERISA disclosure violations.

Supreme Court Rejection of District Court Remedy

The Supreme Court squarely held that ERISA §502(a)(1)(B) gave the court no authority to change the terms of the pension plan as written by the employer. The Court noted that §502(a)(1)(B) speaks of enforcing the terms of the plan, not of changing them.

The Supreme Court also rejected the DOL’s argument that terms of the SPD could be enforced, contrary to the terms of the plan document, when those terms benefited participants. The Supreme Court emphasized that the SPD was intended to provide clear, simple communication, not legally-binding terms.

To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers. . . . [T]he summary documents, important as they are, provide communications with beneficiaries about the plan, but . . . their statements do not themselves constitute the terms of the plan for purposes of §502(a)(1)(B).

The Supreme Court clearly stated that errors in an SPD cannot be enforced under ERISA §502(a)(1)(B) as a contractual claim for benefits.

Equitable Remedies

Although the Supreme Court found no contractual remedy for the ERISA violations under ERISA §502(a)(1)(B), it said that relief was authorized by ERISA §502(a)(3), which allows a participant, beneficiary or fiduciary “to obtain other appropriate equitable relief” to redress violations of ERISA. The Court reiterated its previous decisions that §502(a)(3) authorizes only those categories of relief that were typically available in equity, and rejects claims for “nothing other than compensatory damages.” Mertens v. Hewitt Associates, 508 U.S. 248 (1993); Great-West Life & Annuity Co. v. Knudson, 534 U.S. 204 (2002); and Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006).

The Supreme Court has previously found that “appropriate equitable relief” for fiduciary misrepresentations may be available under §502(a)(3). Varity Corp. v. Howe, 516 U.S. 489 (1996). However, Justice Breyer’s majority opinion goes on to discuss “appropriate equitable relief” in terms that will likely increase ERISA litigation and give plaintiffs’ lawyers substantial ammunition to argue for expanded monetary remedies under §502(a)(3)(B).

The majority opinion states that “reformation of the terms of the plan,” estoppel and injunctive relief might be “appropriate equitable relief” as a remedy when a plan fiduciary provides false or misleading information about plan benefits. The opinion also states that the equitable remedy of “surcharge” might be available as a monetary remedy for breach of fiduciary duty. The opinion thus appears more receptive to broad equitable remedies under ERISA than previous Supreme Court and lower-court decisions.

Prerequisites to Equitable Relief: “Actual Harm Must be Shown”

The majority opinion does not detail what plaintiffs must prove to be entitled to these equitable remedies. Justice Breyer warns that, at a minimum, “a plan participant or beneficiary must show that the violation injured him or her” and that “other prerequisites to relief” may exist that the Court does not discuss. He does emphasize that “actual harm must be shown.”

The Supreme Court does not identify the type of “injury” an individual must show to be entitled to equitable remedies for improper ERISA disclosures. Under traditional principles of estoppel, an individual must show “detrimental reliance” on the misrepresentation. If the individual does not read or fails to act on the misrepresentation, has he or she been harmed? The Court does not tell us, but strongly implies that harm short of “detrimental reliance” may be sufficient for some forms of equitable relief.

Concurring Opinion: No Need to Speculate About Possible Remedies

Justice Scalia’s concurring opinion (joined by Justice Thomas) agreed with the majority that the lower court’s decision was wrong but dismissed the majority’s discussion of remedies as “purely dicta, binding neither on us nor the district court.” Justice Scalia was correct in observing that Justice Breyer’s hypothetical discussion of potential remedies was unnecessary to the Court’s decision, but even Justice Scalia agreed that participants misled by an SPD “will normally be compensated.”

Consequences of Amara

More Litigation. The DOL’s amicus briefs in this and other cases have sought, without previous success, to expand the equitable remedies available under §502(a)(3). Although its arguments were rejected by Amara, the DOL’s public statements have embraced the majority opinion in Amara as a landmark expansion of ERISA remedies. Plaintiffs’ attorneys have made similar statements that substantial monetary relief is now available under §502(a)(3). In the often-complex world of ERISA plan administration, mistakes and miscommunications will occur and are now even more likely to lead to expensive litigation.

The majority opinion opens avenues of litigation under §502(a)(3) that many courts had previously closed. It will take several years to find out what circumstances and proof justify the potential remedies discussed in Amara.

The state of ERISA class action litigation remains muddled. Can the prerequisite of “actual harm” be shown for all class members or must individualized proof of harm be made? As Justice Scalia notes in his concurrence, “questions of reliance would be individualized and potentially inappropriate for class action treatment.”

More Challenges for Plan Administration. Because litigation and monetary remedies are now more likely where errors occur in plan administration and communications, employers and plan fiduciaries need to devote more time and energy to ERISA compliance and careful participant communications. Outsourced call centers and electronic communications provide participants with easy access to benefits information, but on occasion lead to miscommunication.

Amara also teaches a lesson that conscientious fiduciaries already know: sugar-coated, “feel-good” communications about benefit reductions will only lead to problems. Fiduciaries must point out the positives in benefit changes, but must also properly explain any negative impact on participants.

More Consideration Needed for the SPD. Amara’s discussion of the non-binding role of the SPD was helpful in some ways, but ultimately the Supreme Court found that errors or omissions from the SPD might justify equitable relief in some circumstances. Drafting good SPDs has always been a challenge, and drafters must now consider Amara in writing or amending SPDs.

Moreover, Amara’s general statements concerning the role of the SPD did not address the fact that for many ERISA welfare plans – including severance plans, healthcare plans and disability plans – the SPD is, or is part of, the actual plan document. After Amara, this practice deserves further thought.

Correcting Errors in the Plan Document. Amara recognizes the remedy of “plan reformation” but does not address whether a plan can be “reformed” to correct a “scrivener’s error.” In Young v. Verizon’s Bell Atlantic Cash Balance Plan, 615 F.3d 808 (7th Cir. 2010), cert. pet. pending, No. 10-765 (U.S. 2010), the Court of Appeals upheld equitable reformation to correct a drafting error by the employer that benefited participants. If the Supreme Court agrees to hear Young, it will address a whole new set of arguments over ERISA equitable remedies.

Another Nail in the Coffin of DB Plans. Amara will make employers even more reluctant to adopt or continue DB pension plans. As Amara shows, the complexity of DB plan rules and benefit formulas create the risk of error or perceived error in ERISA compliance or disclosures to participants. DB plans are challenging enough to fund and administer, and the potential added expense of ERISA class litigation makes these plans even less attractive.

This legal update was included in the Profit Sharing/401k Council of America Executive Report for May 2011.