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Your ERISA Watch – No Preemption!  9th Circuit Revives Employers’ State-Law Claims Against Health Insurance Companies for Hidden Surcharges and Kickbacks

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The first of this week’s notable decisions is The Depot, Inc. v. Caring for Montanans, Inc., No. 17-35597, __F.3d__, 2019 WL 453485 (9th Cir. Feb. 6, 2019), a published decision from the Ninth Circuit addressing fiduciary actions, plan assets, remedies and preemption.

The gist:  Plaintiffs, employers and members of the Montana Chamber of Commerce, brought ERISA claims and state-law based claims against the defendant health insurance companies for their alleged misrepresentations and padding of healthcare premiums with hidden surcharges used to pay kickbacks to the Chamber and to buy unauthorized insurance products.  The district court dismissed all the claims, concluding that plaintiffs failed to state actionable claims under ERISA and finding that the state-law claims are preempted by ERISA. The Ninth Circuit affirmed the dismissal of the ERISA claims but reversed the dismissal of the state-law claims.

Regarding the ERISA claims, the court made a few important findings.  First, the court held that when Defendants collected and concealed allegedly excessive insurance premium surcharges from the employers, they were not exercising discretionary authority over plan management, and thus, were not acting as ERISA fiduciaries.  Second, the allegedly excessive insurance premium surcharges paid by the employers for coverage under fully-insured health plans were not “plan assets.”  Because the premiums are not plan assets, Defendants were not acting as fiduciaries when collecting, concealing, or spending the surcharges.

The court also determined that the remedies sought by the employers were not equitable in nature and thus, not “appropriate equitable relief” under 29 U.S.C. § 1132(a)(3).  Specifically, the court found that the restitution plaintiffs seek is not equitable because Plaintiffs have not identified a specific fund to which they are entitled and any judgment for Plaintiff would have no connection to any particular fund.  Additionally, Plaintiffs allege that Defendants spent the surcharges.  Even if Defendants did place the surcharges in a general account, the court found it at least conceivable that the account no longer exists.  Because Plaintiffs have not identified any specific property from which the proceeds derived, the Court found that Plaintiffs cannot recover the derivative remedy of disgorgement.

On the state-law claims for fraudulent inducement, constructive fraud, negligent misrepresentation, unjust enrichment, and unfair trade practices under the Montana Consumer Protection Act, the court found that there is no ERISA preemption.  Express preemption does not apply because the claims do not bear on an ERISA-regulated relationship – the misrepresentations occurred initially before Plaintiffs ever agreed to subscribe to a plan.  Conflict preemption does not apply because the duties implicated in the state-law claims do not derive from ERISA and ERISA does not have an enforcement provision that regulates misrepresentations by insurance companies.  Plaintiffs, however, must plead their fraudulent inducement and constructive fraud claims with more particularity, including enough detail on the “who,” “when,” “where,” or “how.”

The next notable decision is a firm victory in Renault v. Unum Life Ins. Co. Of Am., 2019 U.S. Dist. LEXIS 17622 (C.D. Cal. Feb. 1, 2019), where Judge Olguin concluded that UNUM’s benefit calculation provisions in its policy were ambiguous and ordered UNUM to recalculate our client’s earnings based on her reasonable expectations.  Ms. Renault began working for Thompson-Reuters in December of 2013. Unfortunately, she became disabled in September of 2014 as a result of a series of medical issues. UNUM’s policy provided that Ms. Renault’s covered commissions were based on the average commissions earned over the prior two years of earnings, “freezing” as of January 1 of the current year.  In other words, Ms. Renault’s covered earnings were based on her average commissions between 2012 and 2013. Since she had just began working in December of 2013, she had not received any commissions for the first few weeks- despite receiving nearly $100,000 in commissions between Jan 1, 2014, and her disability in September of 2014.

UNUM argued that the plain language of the policy deemed her covered commissions to be zero, despite the absurd result that reading produced.  Further, UNUM argued in trial that even if Plaintiff’s argument that Renault’s 2014 income should be incorporated into her Monthly Earnings, her monthly and quarterly bonuses should not be included in her Monthly Earnings, despite UNUM’s policy explicitly excluding Annual Bonuses (but not quarterly or monthly bonuses) from its earnings provision.  The Court concluded that Renault “is entitled to a Monthly Earnings calculation that includes her 2014 commissions consistent with her reasonable expectations.”  It further concluded that the policy should be “construed in plaintiff’s favor consistent with her reasonable expectations and the plaintiff’s monthly and quarterly bonuses should be included in her monthly earnings.”  The court remanded the matter to Unum to recalculate Renault’s benefits.

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Attorneys’ Fees

Second Circuit

Empire State Carpenters Welfare v. Conway Constr. of Ithaca, Inc., No. 07CV2259DRHSIL, __F.Supp.3d__, 2019 WL 479438 (E.D.N.Y. Feb. 7, 2019) (Magistrate Judge Steven I. Locke).  Defendant succeeded against Plaintiffs’ lawsuit seeking to recover unpaid fringe benefit contributions pursuant to a CBA.  The court denied Defendant’s motion for attorneys’ fees after considering the Chambless factors.  It found that the culpability factor weighs in Plaintiffs’ favor because they brought this lawsuit based on a good faith belief that Defendant neglected to contribute to the Funds.  On the ability to pay, neither party asserted that Plaintiffs would be unable to pay so this factor is neutral.  Since Plaintiffs brought this lawsuit in good faith, the deterrence factor also weighs in their favor.  An award of fees would “merely chill future potentially viable claims.”  The court found the relative merits factor neutral.  Although Defendant ultimately succeeded, Plaintiffs brought this action under a viable theory of law and adduced “formidable” evidence.  The court did not consider the “common benefit” factor since Defendant did not bring the lawsuit.

Fifth Circuit

Cluck v. MetroCare Svcs-Austin, L.P., No. A-16-CV-1216-RP, 2019 WL 459023 (W.D. Tex. Feb. 6, 2019) (Magistrate Judge Andrew W. Austin).  After Defendant succeeded on summary judgment on Plaintiff’s fraud claim based on ERISA preemption, the court recommended granting Defendant’s motion for attorney’s fees and expenses in the amount of $61,010.36.  The court held Plaintiff and each of her four attorneys jointly and severally responsible for paying the fees.

Breach of Fiduciary Duty

Ninth Circuit

The Depot, Inc. v. Caring for Montanans, Inc., No. 17-35597, __F.3d__, 2019 WL 453485 (9th Cir. Feb. 6, 2019) (Before: William A. Fletcher and Jay S. Bybee, Circuit Judges, and Larry A. Burns,* District Judge).  See Notable Decision summary above.

Fentress, et al v. Exxon Mobil Corporation, et al, No. 4:16-CV-3484, 2019 WL 426147 (S.D. Tex. Feb. 4, 2019) (Judge Keith P. Ellison).  The court granted Defendants’ Motion to Dismiss the Second Amended Class Action Complaint because it “does not show that a prudent fiduciary could not conclude that remaining silent could have resulted in a drop in stock prices that would have done more harm than good to the Plan. Although Plaintiffs argue that the drop would have been minor and temporary, the Court has already rejected that argument as inappropriately relying on hindsight.”  The court emphasized that it did not decide whether Exxon or any of its affiliates engaged in false advertising, concealed negative financial or environmental information, or contributed to climate change.

Ely v. Board of Trustees of The Pace Industry Union-Management Pension Fund, No. 3:18-CV-00315-CWD, 2019 WL 438338 (D. Idaho Feb. 4, 2019) (Magistrate Judge Candy W. Dale).  Participant in the Pace Industry Union Management Pension Fund challenges the Board of Trustees’ amendment to its Rehabilitation Plan requiring withdrawing employers to pay an additional exit fee based on the Fund’s accumulated funding deficiency because he alleges that the fee is undermining the Fund’s solvency and violates ERISA.  The court concluded the following:

“Count I fails as a matter of law. Ely cannot state a cause of action under 29 U.S.C. § 1451, because the Updated and Amended Rehabilitation Plan was adopted pursuant to 29 U.S.C. § 1085(e). Nor can Ely state a cause of action under 29 U.S.C. § 1132(a)(3) for violation of the anti-cutback rule, which applies to changes to accrued benefits of participants, not to changes to employer contributions. The notice provisions of Section 1054(h) do not apply, and Ely has not plead facts establishing the Board of Trustees violated the specific notice requirements of 29 U.S.C. § 1085, ERISA § 305.

Counts II and III, for breach of fiduciary and co-fiduciary duties, fail also as a matter of law. The Board of Trustees was not acting in a fiduciary capacity within the meaning of ERISA when it adopted the Updated and Amended Rehabilitation Plan to provide for an additional employer contribution upon withdrawing employers in the form of the AFD Exit Fee.

Nonetheless, the Court finds that the complaint plausibly sets forth allegations sufficient to state a claim for relief under 29 U.S.C. § 1132(a)(3), ERISA § 503(a)(3), which presents a substantive challenge to the reasonable measures under which the amendment to the 2012 Updated and Amended Rehabilitation Plan was adopted pursuant to 29 U.S.C. § 1085(e)(3)(A)(ii), ERISA § 305(e)(3)(A)(ii).”

Tenth Circuit

Scott v. Union Security Insurance Company, No. 17-2686-JWL, 2019 WL 451189 (D. Kan. Feb. 5, 2019) (Judge John W. Lungstrum).  The court found that Defendant did not act unreasonably in denying Plaintiff’s claim for long term disability benefits under the “gainful occupation” test and granted summary judgment to Defendant on Plaintiff’s Section 502(a)(1)(B) claim.  The court found that Plaintiff may pursue a breach of fiduciary duty claim under Section 502(a)(3), wherein he seeks a monetary award to compensate him for the loss of benefits that he allegedly sustained because of his reliance on a material misrepresentation by Defendant.  Defendant mistakenly sent a letter to Plaintiff explaining that he met the definition of disability.  On the merits of the claim, the court found that Plaintiff did not establish that he relied on Defendant’s misrepresentation in choosing not to seek employment.  Although reliance on the letter was reasonable, it does not create any reasonable inference that Plaintiff relied on the letter.  The court granted summary judgment to Defendant on this claim.

Class Actions

Ninth Circuit

Trujillo, etc., et al. v. UnitedHealth Grp., Inc., et al., No. EDCV172547JFWKKX, 2019 WL 493821 (C.D. Cal. Feb. 4, 2019) (Judge John F. Walter).  In this putative class action challenging United’s practices in denying coverage for prosthetic devices for persons suffering from upper and lower limb loss, the court granted Plaintiffs’ Second Renewed Motion for Class Certification.  The class is defined as:  “All persons covered under United plans, governed by ERISA, self-funded or fully insured, whose requests for prosthetic arm and leg devices have been denied during the applicable statute of limitations on the basis of the Minimum Specifications Limitation. Not included in this class are persons whose requests for arm and leg devices have been denied for other reasons.”  Class Counsel is Gianelli & Morris and Doyle Law.

Disability Benefit Claims

Second Circuit

Bennett-Brady v. Aetna Life Insurance Company, et al., No. 14-CV-635S, 2019 WL 483317 (W.D.N.Y. Feb. 7, 2019) (Judge William M. Skretny).  Defendants stipulated to de novo review because they could not locate the policy documents containing discretionary language.  The court denied the parties’ motions for summary judgment because it found that the administrative record contains conflicting reports and opinions as to whether Plaintiff is disabled from “any occupation” due to a psychological or physical limitation.  The court needs to weigh the competing medical opinions and assessment of credibility at a bench trial.  The court found the breach of contract claim preempted by ERISA.

Third Circuit

Patterson v. Aetna Life Insurance Company, No. 17-3566, __F.App’x__, 2019 WL 479209 (3d Cir. Feb. 7, 2019) (Before: CHAGARES, JORDAN, and VANASKIE,* Circuit Judges).  The court affirmed the judgment of the district court.  Aetna was required to interpret “own occupation” as referring to Plaintiff’s actual job duties.  Aetna’s interpretation that it was permitted to consider Plaintiff’s “own occupation” as it’s performed “in the national economy” conflicts with the terms’ plain meaning and “was neither established by Patterson’s policy nor contemplated by the parties.”

Fourth Circuit

Ramirez v. Liberty Life Assurance Company of Boston & Wells Fargo and Company Long Term Disability Plan, No. 3:18-CV-00012-RJC, 2019 WL 469930 (W.D.N.C. Feb. 6, 2019) (Judge Robert J. Conrad, Jr.).  On abuse of discretion review, the court determined that the substantial weight of the evidence points to Plaintiff being disabled under the terms of the Policy; six of the eight Booth factors weigh in Plaintiff’s favor.  The court rejected Liberty’s argument that Plaintiff’s failure to attend therapy appointments suggest that her symptoms are not as severe and intense as she describes.  “[A] hallmark of bipolar disorder is lack of compliance with therapy treatment.”  Plaintiff’s multiple treating physicians acknowledged that Plaintiff had difficulty attending group therapy due to her anxiety.  The court paid short shrift to surveillance showing Plaintiff running errands with her boyfriend, conversing, and laughing.  It explained that a hallmark of bipolar disorder is that it is episodic and that “its victims tend to vacillate between experiencing high highs and low lows.”  The court also rejected Liberty’s argument that Plaintiff’s lack of a medication dosage adjustment shows that her symptoms had improved.  “[N]owhere in the Plan does Liberty state that the absence of medication adjustment is grounds for termination of disability benefits.”  The court found that Liberty’s conflict of interest was significant.  Liberty hired a law firm to represent Plaintiff in appealing her SSDI denial but 21 days later denied her LTD benefits.  On the remedy, the court found that remanding the case to Liberty would be a useful formality.  The substantial weight of the evidence shows that Plaintiff is disabled under the terms of the plan.

Ninth Circuit

Renault v. Unum Life Ins. Co. Of Am., 16cv07078-FMO-KSx, 2019 U.S. Dist. LEXIS 17622 (C.D. Cal. Feb. 1, 2019) (Judge Fernando M. Olguin).  See Notable Decision summary above.

D.C. Circuit

Kemathe v. Reliance Standard Life Ins. Co., No. 1:17-CV-00903 (TNM), 2019 WL 415817 (D.D.C. Feb. 1, 2019) (Judge Trevor N. McFadden).  The court noted that the D.C. Circuit has not ruled on whether district courts should admit evidence outside the administrative record under de novo review, but that two documents Plaintiff seeks the court to review do not create a genuine issue of material fact about whether Reliance erred in denying Plaintiff’s claim for “any occupation” benefits.  First, the SSDI award was issued after Reliance made its final benefits decision so its irrelevant as to whether Plaintiff received a full and fair review.  Plaintiff’s affidavit concerning her IME not being truly independent also creates no genuine dispute.  The court found that Plaintiff’s condition seems to have improved over time, that she can perform other jobs even if not her own occupation, and Plaintiff can perform sedentary work.  The court granted Reliance’s motion for summary judgment.

Discovery

Second Circuit

Acosta v. Wilmington Tr., N.A., No. 17CV6325VSBKNF, 2019 WL 416329 (S.D.N.Y. Feb. 1, 2019) (Magistrate Judge Kevin Nathaniel Fox).  In this case where the Secretary alleges “that Wilmington failed to investigate the value of HCMC Legal, Inc.’s (“HCMC”) stock, relied improperly on an inflated valuation of HCMC’s stock value in approving ESOP’s purchase of 100% of HCMC’s stock and breached its fiduciary duty to the ESOP’s participants and beneficiaries,” the court granted the Secretary’s motion to compel.  Daroth Capital Advisors, LLC must produce 50 e-mail communications to which no attorney-client privilege applies.  There is no privilege because Daroth, an independent contractor with no fiduciary or agency relationship to HCMC, was not HCMC’s agent at the relevant time.

Seventh Circuit

Harris Davis Rebar, LLC v. Structural Iron Workers Local Union No. 1, Pension Trust Fund, No. 17 C 6473, 2019 WL 447622 (N.D. Ill. Feb. 5, 2019) (Judge John Z. Lee).  In this case, seeking declaratory judgment over the requirement to pay contributions to the Fund, the court granted in part Plaintiff’s motion for a protective order and sanctions and granted the Fund’s motion to compel compliance with Rule 26(b)(5) to provide a privilege log within 28 days.

Harris Davis Rebar, LLC v. Structural Iron Workers Local Union No. 1, Pension Trust Fund, No. 17 C 6473, 2019 WL 454324 (N.D. Ill. Feb. 5, 2019) (Judge John Z. Lee).  In this case, where the Fund is seeking to hold the company liable as the successor or alter ego of either one of two companies, the court granted the Fund’s motion to compel in part.  The court found that it would be unduly burdensome for the company to provide unlimited discovery related to its nationwide business activities but the court permitted some discovery into two categories:  (1) requests related to customers, vendors, and projects; and (2) requests related to the management, administration, employment, financial records, property and assets, business locations, and communications regarding the Fund or other employee benefits plans.

ERISA Preemption

Ninth Circuit

The Depot, Inc. v. Caring for Montanans, Inc., No. 17-35597, __F.3d__, 2019 WL 453485 (9th Cir. Feb. 6, 2019) (Before: William A. Fletcher and Jay S. Bybee, Circuit Judges, and Larry A. Burns,* District Judge).  See Notable Decision summary above.

Life Insurance & AD&D Benefit Claims

First Circuit

Arruda v. Zurich Am. Ins. Co., No. CV 17-10105-DPW, __F.Supp.3d__, 2019 WL 470176 (D. Mass. Feb. 6, 2019) (Judge Douglas P. Woodlock).  In this dispute over accidental death benefits, the court found that Zurich’s denial of benefits is not supported by substantial evidence.  Plaintiff was in a car accident and was found dead on the scene.  The autopsy report listed the cause of death as hypertensive heart disease and a postmortem toxicology report found that he had marijuana in his system at the time of the crash.  Zurich denied benefits because it found that the death was not independent of an underlying medical condition and that he was under the influence of marijuana at the time of the accident.  The court found Zurich’s determination unreasonable.  “It makes a speculative leap from the proposition that because Mr. Arruda suffered from heart disease over the course of years, the blunt trauma accident which killed him was caused by that pre-existing condition. This is nothing other than an example of the familiar logical fallacy post hoc ergo propter hoc [since Y followed X, Y must have been caused by X].”  The court also found that there is no evidence in the record regarding how the marijuana in Arruda’s system caused the car accident so the drug exclusion cannot apply.

Eleventh Circuit

Peer v. Liberty Life Assurance Company of Boston, __F.App’x__, 2019 WL 494839 (9th Cir. Feb. 8, 2019) (Before WILLIAM PRYOR, NEWSOM, and GRANT, Circuit Judges).  The court determined that Plaintiff’s claim seeking a declaration as to her future eligibility for life waiver of premium benefits was properly dismissed because it did not present a live case or controversy.  Liberty administratively reversed its earlier denial of the claim.  Absent an adverse benefits determination, there is no ripe claim before the court.  The court cannot adjudicate Plaintiff’s disability status in the future.

Pension Benefit Claims

First Circuit

Lewis v. Sheet Metal Workers’ National Pension Fund, No. 18-CV-287-JJM-PAS, 2019 WL 486623 (D.R.I. Feb. 7, 2019) (Judge John J. McConnell, Jr.).  The court determined that it was neither arbitrary nor capricious for the Plan to postpone Plaintiff’s request for early retirement benefits because of his period of noncovered employment.  Plaintiff argued that the Plan should not delay his retirement because the union did not find him employment under the CBA for three years and he had to take a nonunion job.  The court found that this argument has no relevance to the Plan and is not a basis for not following the Plan’s unambiguous terms.

Venue

Fourth Circuit

Int’l Painters & Allied Trade Indus. Pension Fund v. Marrero Glass & Metal Inc., No. CV ELH-18-452, 2019 WL 423409 (D. Md. Feb. 1, 2019) (Judge Ellen L. Hollander).  In this dispute where the Pension Fund alleges that Defendants failed to make payments owed to the Pension Fund pursuant to collective bargaining agreements, the court granted Defendants’ motion to transfer venue to the Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1404.  Though a plaintiff’s choice of forum is entitled to substantial weight, Maryland has little connection to the merits of the underlying dispute.  The Plan is administered in Maryland but the alleged delinquency occurred in Pennsylvania.  Convenience of the witnesses slightly favors Pennsylvania.  Convenience of the parties’ factor is in equipoise.  The interest of justice factors also favor Pennsylvania.

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