While this blog often discusses disability, life and health insurance/employee benefit decisions under the Employee Retirement Income Security Act of 1974 (“ERISA “), we rarely discuss federal circuit court of appeal decisions from outside the Ninth Circuit Court of Appeals (which governs California).  We are making an exception here, as a recent case from the Sixth Circuit Court of Appeals really caught our attention.  The case is Rochow v. Life Insurance Company of North America, __ F.3d ___ (6th Cir. December 6, 2013).  It is a “game-changer” in the world of ERISA disability, life and health insurance/employee benefit litigation, and could fundamentally change the way in which ERISA remedies are discussed and how these cases are litigated.  To say this is a “plaintiff friendly” case is probably to understate it.

The case otherwise involved a typical denial of disability insurance benefits matter under  ERISA in which the amount of benefits owed was determined to be $910,629.  Despite the large award, that was not actually the interesting part of the case.  The much more interesting part of the case is the court’s ruling affirming an almost $3.8 million disgorgement of profits award.

Daniel Rochow sued for disability benefits under 29 U.S.C. section 1132 (a)(1)(B) of ERISA and also sought equitable accounting and disgorgement of profits as “appropriate equitable relief” under section under 29 U.S.C. section 1132(a)(3). The district court determined that Life Insurance Company of North America’s (LINA) benefit determination had been arbitrary and capricious, and the Sixth Circuit affirmed that decision.  After the case was remanded to the district court, Rochow sought an accounting and disgorgement of profits under 29 U.S.C. section 1132(a)(3).  The district court applied a return-on-equity (“ROE”) analysis to the disgorgement claim, and awarded an additional $3.8 million in disgorged profits against LINA.

LINA appealed the second district court decision as well, but in a 2-to-1 decision, the Sixth Circuit again affirmed the district court. The court addressed and upheld Rochow’s argument that ERISA allows separate claims for withheld benefits under 29 U.S.C. section 1132(a)(1)(B) and breach of fiduciary duty claims under 29 U.S.C. section 1132(a)(3).  The majority held that because Rochow had sought the disgorgement remedy as a separate claim of relief, disgorgement was an appropriate remedy for the arbitrary and capricious benefit denial.  This remedy was based on LINA’s ill-obtained earnings on the amount it did not pay Rochow but should have paid him.  The court explained that “disgorgement does not result in double compensation, nor does it represent punishment.

The court rejected LINA’s argument that allowing Rochow to maintain a breach of fiduciary duty claim based on a denial of benefits would frustrate ERISA’s goal of providing an inexpensive and expeditious dispute resolution process, by explaining that “ERISA also has a goal of ensuring that plan fiduciaries act solely in the interest of the participants and for the exclusive purpose of providing benefits to their participants.”  The majority also affirmed the district court’s application of a ROE method of calculating the disgorgement claim, rather than LINA’s analysis that equated disgorgement of profits to an award of prejudgment interest on the withheld benefits. The court, quoting the Ninth Circuit’s phraseology that the fundamental tenet of disgorgement is “if you take my money and make money with it, your profit belongs to me,” determined that the rationale for the more generous disgorgement award was the fact that LINA did not retain the unpaid benefits in a segregated account, but rather retained the money in its general assets.

The dissent echoed LINA’s positions, viewing the majority’s holding as shortsighted.  It criticized the majority decision as “willfully blind to the negative repercussions that undoubtedly will ensue in ERISA benefits litigation,” with the dissent also stating:

Furthermore, disgorgement under the circumstances of this case fundamentally alters how denied disability-benefits claims are litigated, forcing district courts to wrestle with complex calculations of profits and raising the specter that any claimant who was arbitrarily and capriciously denied benefits would have a viable claim for disgorgement.

We expect to see a request for reconsideration and/or rehearing en banc.  Although we would not be surprised if the decision survives circuit review, LINA will almost certainly seek relief in the United States Supreme Court as this decision has too many implications for LINA to let this ground-breaking decision remain good law.  There can be little question that in the short term, this case will substantially alter ERISA litigation.  As for this firm, we will attempt to use this decision to assist our plan participant/beneficiary clients, including amending some of our existing complaints to expand the relief we are requesting to include disgorgement claims.  We look forward to seeing how this all unfolds.  It will be very interesting for sure.