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Your ERISA Watch – Second Circuit Holds that Participants Stated Plausible ERISA Claim for Breach of Duty to Manage ESOP Assets Prudently

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This week’s notable decision is the Second Circuit’s decision in Jander v. Ret. Plans Comittee of IBM, No. 17-3518,__F.3d__, 2018 WL 6441116 (2d Cir. Dec. 10, 2018), where the Court was presented with the question of what standard one must meet to plausibly allege that fiduciaries of an employee stock option plan (“ESOP”) have violated ERISA’s duty of prudence.

In this case, Plaintiffs, who are participants in the company’s ESOP, claim that the plan’s fiduciaries failed to disclose its knowledge that a company division was overvalued, which lead to an artificially inflated company stock price that harmed the ESOP members.

A duty-of-prudence claim requires Plaintiffs to plausibly allege that a proposed alternative action would not have done more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already head by the fund.  Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2473, 189 L. Ed. 2d 457 (2014).

The Second Circuit identified that the test set forth in Fifth Third to determine whether a plaintiff has plausibly alleged that the actions a fiduciary took were imprudent in light of available alternatives is unclear.  It explains,

“The Court first set out a test that asked whether ‘a prudent fiduciary in the same circumstances would not have viewed [an alternative action] as more likely to harm the fund than to help it.’ Id. at 2472 (emphasis added). This formulation suggests that courts ask what an average prudent fiduciary might have thought. But then, only a short while later in the same decision, the Court required judges to assess whether a prudent fiduciary ‘could not have concluded’ that the action would do more harm than good by dropping the stock price. Id. at 2473 (emphasis added). This latter formulation appears to ask, not whether the average prudent fiduciary would have thought the alternative action would do more harm than good, but rather whether any prudent fiduciary could have considered the action to be more harmful than helpful. It is not clear which of these tests determine whether a plaintiff has plausibly alleged that the actions a defendant took were imprudent in light of available alternatives.”

Jander, 2018 WL 6441116, at *5.  Rather than settle this dispute, the Court declined to decide which of the two standards is correct.  This is because it found that Plaintiff plausibly pleads a duty-of-prudence claim even under the more restrictive test.

The Court disagreed with the district court’s determination that a prudent fiduciary could have concluded that the three proposed alternative actions—disclosure, halting trades of IBM stock, or purchasing a hedging product—would do more harm than good to the fund.  On appeal, Plaintiff proposed just one alternative action:  early corrective disclosure of the microelectronics division’s impairment, conducted alongside the regular SEC reporting process.   The Court found that a prudent fiduciary could not have concluded that the corrective disclosure would do more harm than good.  The Plan Defendants allegedly knew that IBM stock was artificially inflated, they had the power to disclose the trust to the public and correct the artificial inflation, and the failure to promptly disclose the value of the IBM division hurt management’s credibility and the long-term prospects of IBM as an investment.  Plaintiff “plausibly alleges that a prudent fiduciary need not fear an irrational overreaction to the disclosure of fraud.”  Lastly, Defendants knew that the disclosure of the truth was inevitable because IBM was likely to sell the business and would not be able to hide its overvaluation from the public at that point.

For these reasons, Plaintiff has stated a claim for violation of ERISA’s duty of prudence.  The dismissal of the parallel securities suit is not preclusive and Plaintiff may allege that the Plan Defendants knew about the overvaluation and failed to disclose it.

In addition to Jander, there were quite a few other notable decisions, including the Second Circuit’s decision in Testa v. Becker, No. 17-1826-CV, __F.3d__, 2018 WL 6518082 (2d Cir. Dec. 12, 2018).  Read about Testa and many others below.

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

Attorneys’ Fees

Sixth Circuit

Zack v. McLaren Health Advantage, Inc., No. 17-11253, 2018 WL 6571230 (E.D. Mich. Dec. 13, 2018) (Judge Terrence G. Berg).  The court previously granted Plaintiff’s motion for judgment on the administrative record, finding that Defendant’s reimbursement of Plaintiff’s hiatal hernia repair was arbitrary and capricious.  The court granted Plaintiffs’ Motion for Attorney’s Fees and Costs and ordered Defendant to pay $12,148.64.  It found that the requested rate of $300/hour is reasonable according to the State Bar of Michigan’s Economics of Law Practice in Michigan, which places $300 per hour just above the median for managing partners, and below the median for attorney’s practicing plaintiff-side insurance law.  The court did not award reimbursement of online legal research charges because Plaintiffs did not provide evidence establishing that passing on those costs to clients are a local practice beyond their bare assertion.

Breach of Fiduciary Duty

Second Circuit

Jander v. Ret. Plans Committee of IBM, No. 17-3518,__F.3d__, 2018 WL 6441116 (2d Cir. Dec. 10, 2018) (Before: Katzmann, Chief Judge, Sack and Raggi, Circuit Judges).  See Notable Decision summary above.

Fourth Circuit

Acosta v. Chimes District of Columbia, Inc., et al., No. CV RDB-15-3315, 2018 WL 6492518 (D. Md. Dec. 10, 2018) (Judge Richard D. Bennett).  “[T]his Court holds that although Chimes DC is a Plan Administrator and named fiduciary, and Chimes International is a Plan Administrator, there are material factual disputes that prevent judgment as a matter of law that they are de facto fiduciaries. This Court holds that Martin Lampner and Albert Bussone are not de facto fiduciaries, and they cannot be found liable as non-fiduciaries, so judgment shall be granted in their favor on all Counts asserted against them. The remaining issues related to fiduciary breaches and prohibited transactions shall proceed to trial for resolution.”

Acosta v. Chimes District of Columbia, Inc., et al., No. CV RDB-15-3315, 2018 WL 6581162 (D. Md. Dec. 12, 2018) (Judge Richard D. Bennett).  The court denied the parties’ motions for summary judgment with respect to FCE Benefit Administrators, Inc., Stephen Porter, and Gary Beckman.  “Quite simply, there are genuine issues of material fact with regard to whether there was fiduciary activity, and if so, whether there was a breach of fiduciary responsibility.  Accordingly, all remaining claims and Defendants shall proceed to trial, which will commence on January 7, 2019.”

Ninth Circuit

Cheap Easy Online Traffic School v. Peter L. Huntting & Co., Inc., et al., No. 16CV2644-WQH-MSB, 2018 WL 6567809 (S.D. Cal. Dec. 13, 2018) (Judge Hayes).  The court granted Defendants’ motion for summary judgment because it found no genuine issues of material fact exist as to ERISA functional fiduciary liability.  “The evidence in the record shows that Defendants provided Plaintiffs with annual funding recommendations. Defendants performed third-party actuarial, administrative, and consulting services. Defendants prepared and filed government-required filings.  The evidence in the record shows that Defendants were not insiders, did not have check-writing authority or access to plan assets, and did not engage in self-dealing. Plaintiffs provide no evidence of payments for investment advice to any Defendant. Defendants did not hold a position of trust and confidence.”  The court also explained that “Defendants’ superior knowledge does not give rise to ERISA functional fiduciary liability, even if Defendants provided insufficient information and poor advice.”  In addition, the evidence shows that Defendants’ involvement in the decision to terminate the Plans did not go beyond the scope of usual professional conduct.

Doe v. CVS Pharmacy, Inc., et al., No. 18-CV-01031-EMC, 2018 WL 6574191 (N.D. Cal. Dec. 12, 2018) (Judge Edward M. Chen).  This putative class action alleges discrimination with respect to HIV/AIDS medications under employer-offered prescription drug benefit plans.  Specifically, Plaintiffs allege that they are only able to obtain their HIV/AIDS medications at favorable “in-network” rates via mail or a CVS pharmacy but not from other non-CVS pharmacies where Plaintiffs used to be able to get their medications.  Among other claims, Plaintiffs brought a claim for benefits under ERISA, a claim for breach of fiduciary duties under ERISA, and a failure to provide full and fair review under ERISA.  The court granted Defendants’ motion to dismiss.  It held that the “ERISA claims against CVS fail because their benefit plans do not entitle them to the benefit they seek and because CVS is not an ERISA fiduciary with respect to the benefit plans. Plaintiffs’ ERISA claims against Employer Defendants fail for similar reasons.”

Eleventh Circuit

Secretary of Labor v. General Projection Systems, Inc., et al., No. 617CV855ORL37KRS, 2018 WL 6445110 (M.D. Fla. Dec. 10, 2018) (Judge Roy B. Dalton, Jr.).  The court granted the Secretary’s motion for default judgment only “to the extent that it finds that Defendant General Projection Systems, Inc. is liable for violations of 29 U.S.C. §§ 1104(a)(1)(A), 1104(a)(1)(B), 1106(a)(1)(D), 1106(b)(1), and 1106(b)(2).”

Disability Benefit Claims

Second Circuit

Thoma v. Fox Long Term Disability Plan, No. 17 CIV. 4389, 2018 WL 6514757 (S.D.N.Y. Dec. 11, 2018) (Judge Robert W. Sweet).  De novo review applies because the “Appointment of Claim Fiduciary” is not part of the Plan, and even if the policy did confer discretionary authority, de novo review would still be appropriate because Defendants have failed to demonstrate that they complied with ERISA’s procedural regulations.  The court determined that Plaintiff is entitled to LTD benefits from the date they were terminated to the present.  The IME doctor did not explain why he rejected Plaintiff’s complaints, the treating physician opinions, or the medical literature corroborating her experience.  LINA’s surveillance did not show activities inconsistent with Plaintiff’s reported disability.  LINA had approved her claim, after its own medical examinations, several times.  It prompted her to apply for SSDI benefits and the SSA found her disabled.  The SSA finding is corroborated by evidence in the record.  Plaintiff has shown her entitlement to benefits by the preponderance of the evidence.

Fourth Circuit

Griffin v. Charter Communications Short Term Disability Plan, No. 5:17-CV-308-BO, 2018 WL 6436267 (E.D.N.C. Dec. 7, 2018) (Judge Terrence W. Boyle).  When presented with conflicting medical opinions as to Plaintiff’s disability from psychiatric impairments and hypertension, the claims administrator did not abuse its discretion in relying on its reviewing doctors and denying Plaintiff’s short-term disability benefits.  Defendant’s reviewing doctors made several unsuccessful attempts to speak to Plaintiffs’ treating doctors.  “While plaintiff correctly argues that the claims administrator could have notified him that it had been unsuccessful in reaching Dr. Mizelle [], it cannot be said that contacting a physician six times over a period of days did not satisfy the claims administrator’s duty to retrieve and consider relevant information, which was not readily available given the unresponsiveness of Dr. Mizelle.” (internal citation omitted).

Ninth Circuit

Johnson v. Aetna Life Insurance Company; et al., No. 17-55501, __F.3d__, 2018 WL 6445878 (9th Cir. Dec. 10, 2018) (Before: RAWLINSON and BEA, Circuit Judges, and BASTIAN, District Judge).  The court affirmed the denial of short-term disability benefits to a Fed-Ex driver whose “doctors opined that he cannot or should not lift 75 pounds, which is an essential function of his job as a courier.”  The court explained that these recommendations are not “significant objective findings” as required by the plan.  Though Plaintiff had objective findings on MRI, his doctor’s observation of his discomfort when transferring from sitting to standing, and multiple references to “lumbosacral tenderness,” are subjective findings because they require input from the patient’s complaints of pain.  Aetna did not abuse its discretion in denying benefits.

Tenth Circuit

Dewsnup v. Unum Life Insurance Company of America, No. 2:17-CV-00126-TC, 2018 WL 6478886 (D. Utah Dec. 10, 2018) (Judge Tena Campbell).  On de novo review, the court determined that Plaintiff, a former trial attorney, was entitled to disability benefits due to his constant pain following a quadruple bypass heart surgery.  “According to Unum, certain evidence in the record contradicts Mr. Dewsnup’s self-reported pain: diagnostic tests confirmed his physical ability to work and did not corroborate his pain, his activity level was increasing, and he had discontinued or refused medication and procedures to treat his pain. Unum also notes that all five of its reviewers opined that Mr. Dewsnup was no longer disabled. But none of Unum’s reasons undermine Mr. Dewsnup’s credibility or speak to his ability to perform the material job duties of a trial attorney.”  Regarding the lack of diagnostic testing, the court explained that “neuropathic pain lacks testable, objective indicia.”  The fact that Plaintiff declined further treatment in spite of his pain does not suggest that his pain was generally tolerable.  He did experience significant side effects with certain medications.  The court awarded past-due benefits and pre-judgment interest at 5% per annum, but not attorney’s fees since Unum did not act in bad faith and the case does not involve a significant legal question regarding ERISA or apply broadly to all plan participants.

D.C. Circuit

Arabaitzis v. Unum Life Ins. Co. of Am., No. 1:16-CV-01273 (TNM), 2018 WL 6530534 (D.D.C. Dec. 11, 2018) (Judge Trevor N. McFadden).  Former law firm employee challenged Unum’s termination of her long term disability benefit claim.  Following the court’s adoption of the MJ’s report and recommendation denying Plaintiff’s motion for summary judgment and granting Unum’s cross-motion, the court denied Plaintiff’s motion for reconsideration under Rule 59(e).  Reconsideration is not necessary to prevent manifest injustice.  Plaintiff failed to timely file objections to the R&R.  “‘Close’ counts with horseshoes and hand grenades, not filing deadlines.”  On the merits, Plaintiff has not shown a clear error in the MJ’s consideration of specific arguments or evidence.

ERISA Preemption

Third Circuit

Comprehensive Spine Care, P.A. v. Oxford Health Ins., Inc., No. CV 18-10036 (JLL), 2018 WL 6445593 (D.N.J. Dec. 10, 2018) (Judge Jose L. Linares).  In this suit by a provider against an insurance company for payment of preauthorized medical services, the court found that Plaintiff’s claims for breach of contract, promissory estoppel, account stated, and quantum meruit do not satisfy the first prong of the Pascack test and are therefore not completely preempted by § 502(a).  Plaintiff is not “the type of party” that can bring a § 502(a) claim and Plaintiff also does not allege the existence of an assignment of Patient’s rights under an ERISA plan to Plaintiff, which would allow Plaintiff to stand in Patient’s shoes.  In addition, Plaintiff’s claims cannot be construed as colorable claims for benefits under § 502(a) because Plaintiff does not challenge the type, scope or provision of benefits under an ERISA-regulated plan, but rather only asserts its right as a third-party provider to be reimbursed for pre-authorized medical services it rendered to Patient.  The court also found that the claims are not expressly preempted by ERISA.

Fifth Circuit

Peifer v. Reliance Standard Ins. Co., No. CV 18-6755, 2018 WL 6435891 (E.D. La. Dec. 6, 2018) (Judge Sarah S. Vance).  In this dispute over life insurance benefits, Plaintiff’s petition asserts claims for negligence, breach of contract, and unjust enrichment against Reliance; negligence and unjust enrichment against NGHS; and a claim under La. R.S. 22:1973, which provides that insurers owe insureds a duty of good faith and fair dealing.  The court found that “(1) plaintiffs’ state law claims are preempted by ERISA; (2) plaintiff Sophia Guidry states a claim under ERISA § 502(a)(1)(B) against Reliance, but not NGHS; (3) all of plaintiffs’ other ERISA claims must be dismissed, and (4) granting plaintiffs leave to file their second amended complaint would be futile.”  The SAC includes a new allegation that both defendants are liable for the negligent acts of their employees under the theory of respondeat superior.  Since the only remaining claim is the Section 502(a)(1)(B) claim against Reliance, Plaintiff need not prove that the denial of the claim was due to negligence.

Sixth Circuit

Caimona v. Ohio Civil Service Employees Association, et al., No. 4:18CV785, 2018 WL 6423441 (N.D. Ohio Dec. 6, 2018) (Judge Benita Y. Pearson).  In this suit over denied disability benefits under a plan administered by Prudential under a CBA between OCSEA and union Public Employees Representative Union Local 5, the court determined that Plaintiff’s claims for Declaratory Judgment and Breach of the Covenant of Good Faith are preempted by ERISA and converted them to a single claim under 29 U.S.C. § 1132(a).  The court also struck the Plaintiff’s claims for exemplary damages because those are not authorized under ERISA.

Life Insurance & AD&D Benefit Claims

Eighth Circuit

Venditti v. Unum Life Insurance Company of America, No. 18-CV-25-LRR, 2018 WL 6571204 (N.D. Iowa Dec. 13, 2018) (Judge Mark A. Roberts).  The court determined that Unum’s fact-based determinations and interpretation of “contributed to” in the AD&D policy’s exclusion for losses contributed to by the use of alcohol in combination with any drug is reasonable.  Specifically, Unum reasonably denied benefits on the basis that “Mr. Schnede’s intoxication from alcohol and THC contributed to his decision to cross the six-lane road without a traffic signal or crosswalk and his failure to yield to the car or his inability to avoid being hit by the car. The bodily injuries were not caused solely by external, violent, and accidental means because they were contributed to by combined alcohol and THC intoxication.”

Medical Benefit Claims

Ninth Circuit

Meyers v. Kaiser Found. Health Plan Inc., No. 17-CV-04946-LHK, 2018 WL 6505391 (N.D. Cal. Dec. 11, 2018) (Judge Lucy H. Koh).  The court determined that Kaiser did not abuse its discretion by denying reimbursement for the four months of out-of-network treatment A.M. received at Elevations RTC/Seven Stars because the treatment was not an emergency service, it was not “out-of-area urgent care,” and it was not covered under the exception for services that are not available in-network.

Pension Benefit Claims

Second Circuit

Testa v. Becker, No. 17-1826-CV, __F.3d__, 2018 WL 6518082 (2d Cir. Dec. 12, 2018) (Before: Parker, Livingston, Chin, Circuit Judges).  This lawsuit was an offshoot of the Frommert v. Conkright litigation regarding the application of a phantom account offset of employees who left Xerox, later returned, and retired again.  Testa left Xerox in 1983 and took a lump sum. He was rehired in 1985 and retired in 2008.  At that time, the phantom account offset was applied to his benefits, which he contested before filing suit.  The court held that his claim began accruing in 1998 when Becker updated the SPD to state clearly that the offset would be used for all employees.  Testa’s claim was not tolled since 1999 when the Frommert plaintiffs sued.  Plaintiff’s denial-of-benefits clam became untimely in 2004 so the court affirmed the district court’s dismissal of the claim.  The court agreed with Becker that Frommert I did not foreclose Becker from raising legitimate affirmative defenses against rehired employees.  If Becker could apply the phantom offset to participants who waived ERISA rights in Frommert II, then he can also apply it to participants who cannot bring timely claims.  Testa’s breach of fiduciary duty claim based on the argument that Defendants did not comply with the Court’s decision in Frommert I by stopping the application of the offset to every single rehired employee who was hired before 1998 is a simple repackaging of the denial-of-benefits claim.  The court reversed the grant of summary judgment to Testa on the breach of fiduciary duty claim.

Fourth Circuit

Golden v. Barnett, No. 18-1665, __F.App’x__, 2018 WL 6433586 (4th Cir. Dec. 7, 2018) (Before NIEMEYER and KING, Circuit Judges, and SHEDD, Senior Circuit Judge).  “The Trustees terminated Golden’s retirement benefits after concluding that he held an ownership interest in his former employer, thereby disqualifying him from coverage. However, the district court, after applying the eight factors provided in Booth v. Wal-Mart Stores, Inc. Assocs. Health & Welfare Plan, 201 F.3d 335, 342-43 (4th Cir. 2000), concluded that the Trustees’ decision was erroneous.  We have reviewed the record included on appeal, as well as the parties’ briefs, and we find no reversible error in the district court’s judgment. Accordingly, we affirm for the reasons stated by the district court.”

Plan Status

Eighth Circuit

Mills v. Amphenol Corporation, No. 4:18 CV 1067 CDP, 2018 WL 6445624 (E.D. Mo. Dec. 10, 2018) (Judge Catherine D. Perry).  The court determined that Plaintiff’s lawsuit seeking to “recover on the promise made in a free-standing, single-employee contract – that is, that he be provided health coverage that other executives receive, and on the same terms, at no cost to him” does not arise under ERISA.  The employment agreement at issue is not itself an ERISA plan nor does it reference an existing plan.  The court denied Defendant’s motion to dismiss.

Eleventh Circuit

Allen, M.D., v. First Unum Life Insurance Company, No. 2:18-CV-69-FTM-99MRM, 2018 WL 6528132 (M.D. Fla. Dec. 12, 2018) (Judge John E. Steele).  In this suit by a doctor to recover under five disability insurance policies, the court denied Defendants’ motion for judgment on the pleadings since the Answer and exhibits submitted by Defendants do not meet their burden to prove as a matter of law that an ERISA plan exists to preempt plaintiff’s state law claims under Section 1144 at this stage.  There are material disputed facts.  “For example, Dr. Allen states in his Declaration and submits documents in support that he paid all premiums for the individual policies. Yet defendants submit documents that might show that premiums were billed to Prospect Hill, or that in consideration for Prospect Hill’s assistance Dr. Allen received a discount, which could affect the analysis on whether ERISA applies (as well as the applicability of ERISA’s safe-harbor provision).”

Provider Claims

Third Circuit

University Spine Center v. Anthem Blue Cross Blue Sheild, No. CV182912ESCLW, 2018 WL 6567702 (D.N.J. Dec. 13, 2018) (Judge Esther Salas).  “[T]he Court has reviewed the anti-assignment provision and finds it to be clear, unambiguous, valid, and fully enforceable. As already noted, the anti-assignment provision does not allow assignment of benefits, or for that matter, the right to payment. Accordingly, the Patient’s assignment of rights or benefits to Plaintiff is void. In the absence of a valid assignment from the Patient, Plaintiff lacks standing under ERISA to pursue any of the claims in this action.”


Fifth Circuit

Maccarone v. Lineage Law, LLC, No. CV 17-212-SDD-EWD, 2018 WL 6579161 (M.D. La. Dec. 13, 2018) (Judge Shelly D. Dick).  The court determined that Plaintiff’s claim breach of fiduciary duty claim pursuant to 29 U.S.C. § 1132(a)(3) of ERISA, which seeks equitable relief in the form of monetary reimbursement of medical expenses incurred as a result of the retroactive cancelation of the group healthcare policy, may proceed.  The remedy she seeks is within the scope of appropriate equitable remedies available under Section 502(a)(3).  Plaintiff also properly brought the claim under Section 502(a)(3); she cannot bring a claim under Section 502(a)(1)(B) since the healthcare plan has been terminated.

Retaliation Claims

Sixth Circuit

Spangler v. East Kentucky Power Cooperative, Inc., No. CV 5: 18-556-DCR, 2018 WL 6424693 (E.D. Ky. Dec. 6, 2018) (Judge Danny C. Reeves).  Following the death of her husband, who also worked for Defendant, Plaintiff claims she returned to work and sought help navigating spousal death benefit options from an HR employee and the company’s General Counsel.  At a meeting, Plaintiff alleges she was “verbally assailed, harassed, and physically threatened.”  Following another similar incident, Plaintiff did not return to work and filed suit alleging wrongful termination and constructive termination.  The court found that Plaintiff’s state law claims are preempted by ERISA since she relies on ERISA Section 510 for her wrongful termination claim.  The court also determined that Plaintiff did not plead sufficient facts to state a plausible claim for interference under Section 510.  The court denied her request for oral argument and dismissed her claims with prejudice.


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