ERISA - Fiduciary Duty Archives - Page 2 of 3

Bain v. Oxford Health Insurance: Judge Finds Insurer Liable for Breach of Fiduciary Duty Under ERISA As Medical Necessity Guidelines Were Inconsistent With Medical Standards of Care

In a recent decision by the U.S. District Court for the Northern District of California, Bain v. Oxford Health Insurance, 2020 WL 808236, the Court held that it is an abuse of discretion for an insurance company to rely on unreasonable medical necessity guidelines, to decide benefit claims, when these guidelines are inconsistent with the standards of care generally accepted in the field of mental health treatment. In Bain, the Plaintiffs filed a lawsuit against the plan administrator of their health insurance plan and its affiliate United Behavioral Health (collectively, “UBH”) after their daughter’s claim for mental health services was repeatedly denied. In making its coverage determinations for mental health services, UBH utilized “Level of Care Guidelines” (“LOC Guidelines”), which were not formally part of the Plan.

While the Bain’s lawsuit was filed in July 2015, it was stayed in April 2017 due to another class action lawsuit, Wit v. United Behavioral Health, No. C-14-2346 JCS (N.D. Cal.) pending against UBH. In Wit, the plaintiffs asserted that UBH breached its fiduciary duty because it developed LOC Guidelines which were “far more restrictive than [the standards of care] that are generally accepted [in field of mental health treatment] even though Plaintiff’s health insurance plans provide for coverage of treatment that is consistent with generally accepted standards of care, and by prioritizing cost savings over member’s recovery of benefits.” Plaintiffs maintained that UBH “improperly adjudicated and denied [their] requests for coverage by … relying on the overly restrictive [LOC] Guidelines.”

On the claim for breach of fiduciary duty, the Judge in Wit found in favor of the plaintiffs and held that “by adopting ‘unreasonable’ Guidelines that do not reflect generally accepted standards of care, UBH breached its fiduciary duty.” The LOC Guidelines were found to be flawed as follows: (1) The LOC Guidelines significantly narrowed the scope of coverage by excessively emphasizing “acute symptoms and stabilizing crises while ignoring the effective treatment of underlying conditions;” (2) The LOC Guidelines “actively seek to move patients to the least restrictive level of care at which [patients] can be safely treated, even if a lower level of care may be less effective for that patient;” (3) The LOC Guidelines fail to address the unique needs of children and adolescents; and (4) The LOC Guidelines “deviated from generally accepted standards of care by using an overly broad definition of ‘custodial care’ and an overly narrow definition of ‘active’ treatment and ‘improvement’.”

Based on the decision in Wit, the Bains filed a Motion for Judgment asserting that they were entitled to judgment on their claim based on the ruling in Wit, specifically because (1) in Wit, the Judge found in favor of the plaintiffs on their claim for benefits and (2) that the doctrine of collateral estoppel bars UBH from relitigating the Bains’s claim.

The Bains’s Motion for Judgment was denied in part and granted in part. The Court did agree with the Bains that it should give collateral estoppel effect as to the “standard of review” to be applied to UBH’s decision to deny benefits. The Wit court had previously determined the standard of review to be applied is abuse of discretion, meaning that the UBH’s denial would only be overturned if it was not reasonable. The Bains argued that the Court’s review for abuse of discretion should factor in a significant conflict of interest, since UBH is both paying out on claims of benefits and deciding claims of benefits. Therefore, the Bains argued the LOC Guidelines were based on financial considerations rather than medical considerations. The Court agreed there was a conflict of interest as to the LOC Guidelines and applied a significant amount of skepticism to UBH’s decision to deny the Bains’s benefits. The Court in Bains ultimately held that UBH abused its discretion in denying the Bains’s claim for benefits and remanded the case to the plan administrator for a renewed evaluation.

Lack of medical necessity is the most frequent basis for health insurance denials. As Bains demonstrates, an insurer’s medical necessity guidelines may be out of step with reasonable standards in the medical community. Fighting with your insurer over a legitimate claim for health, life, long-term disability or other insurance benefits can be a daunting task. If you believe your claim for benefits was unjustly denied, please contact us.

Breach of Fiduciary Duty under ERISA: Ninth Circuit Clarifies That Mere Disclosure of Plan Documents Is Insufficient “Actual Knowledge” to Trigger Statute of Limitations

In pension and savings plan cases, it can often take several years before an employee realizes that there has been a breach of fiduciary duty. Typically, an employee’s financial loss triggers an investigation that later reveals the facts of the breach. But how long does an employee have to bring a claim in court? The answer depends on the employee’s “actual knowledge” of the facts of the breach or violation. There is a conflict among federal circuit courts of appeal on whether an employee should be deemed to have knowledge of 401(k) prospectuses and fund information simply because the employer makes this information available to the employee. In a recent decision by the Ninth Circuit, Sulyma v. Intel Corp. Investment Policy Comm., 909 F.3d 1069 (9th Cir. 2018), the court clarified that mere disclosure does not equate to actual knowledge of the employee sufficient to begin the statute of limitations. The employee must actually be aware of the facts constituting the breach more than three years before filing suit.

The Employee Retirement Income Security Act of 1974 (“ERISA”) governs pension plans, including employer sponsored 401(k) retirement plans. ERISA imposes duties of loyalty and care upon fiduciaries as well as liability for breach of those duties. See 29 U.S.C §§ 1104 (duties) and 1109 (liability of breach). Fiduciaries must act “solely in the interest of the participants and beneficiaries” and exercise “the care, skill, prudence, and diligence … that a prudent man acting in a like capacity and familiar with such matters would use.” Id. § 1104(a)(1). Employees bringing a claim for breach of fiduciary duty must do so within three years of the “earliest date on which the employee has actual knowledge of the breach or violation,” and no more than six years after the last action which constituted a part of the breach or violation. Id. § 1113.

In Sulyma, the Ninth Circuit clarified that an employee must be actually aware of the facts of the breach and not merely in possession of materials from which the employee could have discovered the breach. Sylyma, 909 F.3d at 1076. Like many employees, Plaintiff Christopher Sulyma did not pay too much attention to the lengthy disclosures and prospectuses associated with his employer’s 401(k) plan. Sulyma worked for Intel between 2010 and 2012, during which time he was automatically enrolled in Intel’s Target Date 2045 Fund (“the Fund”). The Fund was managed by an investment committee appointed by Intel’s Board of Directors. Intel provided Sulyma with various disclosures about the Fund’s investments, which were also available on two websites. These documents revealed that the Fund made allocations to alternative investments such as hedge funds and private equity funds, which charged higher than average fees and underperformed the market. Although Sulyma accessed some of the disclosures during his employment, Sulyma testified that he did not know Intel had allocated the Fund’s portfolio in alternative investments, or that this was the reason for the Fund’s poor performance.

In 2015, Sulyma eventually learned of the Fund’s poor performance and brought claims against Intel’s oversight committees under § 1104 of ERISA on the basis that Intel made imprudent investments, failed to disclose those investments, failed to monitor the performance of those investments, and failed to remedy other defendants’ ERISA violations despite knowing about them. What followed was a battle over whether Sulyma’s claims were barred by ERISA’s three-year statute of limitations.

Intel moved to dismiss Sulyma’s complaint, arguing before the U.S. District Court for the Northern District of California that ERISA’s three-year statute of limitations barred Sulyma’s claims. Sulyma filed his action against Intel on October 29, 2015, and Intel claimed Sulyma had actual knowledge of the alleged breach before October 2012 since he had access to the Fund documents as early as 2010. The district court sided with Intel and imputed the knowledge of the Fund’s portfolio allocation to Sulyma, reasoning that had Sulyma read the Fund literature more than three years prior to filing his complaint, he would have known about the allegedly imprudent investments. Construing Intel’s motion to dismiss as a motion for summary judgment, the district court granted summary judgment in favor of Intel holding that Sulyma’s claim was barred by ERISA’s three-year statute of limitations under 29 U.S.C. § 1113(2).

On appeal, the Ninth Circuit reviewed the district court’s grant of summary judgment de novo and employed a two-step process to determine whether Sulyma’s claim was barred by section 1113(2). First, the court isolated and defined the underlying violation on which plaintiff’s claim is founded. Second, the court inquired into whether plaintiff had “actual knowledge” of the alleged breach or violation. Sulyma, 909 F.3d at 1072-73. With respect to the first prong, the record showed that although the Fund did not always invest in alternative investments, the imprudent actions alleged by Sulyma occurred during his employment, as early as 2010. Id. at 1071. The primary issue on appeal was whether the district court correctly interpreted section 1113(2)’s requirement of “actual knowledge” sufficient to begin the three-year statute of limitations prior to October 2012.

First, looking to the statute itself, the Ninth Circuit acknowledged that neither “knowledge” nor “actual knowledge” is defined in ERISA. Sulyma, 909 F.3d at 1073. Examining the history of section 1104 and 1106 cases, the court noted that in 1987, Congress amended section 1113(2) to remove constructive knowledge from triggering the limitations period. Id. The Ninth Circuit found that the district court erred when it inferred that Sulyma had actual knowledge merely because he received Fund documents that disclosed its investment strategy. Id. Such an inference is akin to constructive not actual knowledge. Id. The court explained, “the statutory phrase ‘actual knowledge’ means what it says: knowledge that is actual, not merely a possible inference from ambiguous circumstances.” Id. at 1076 (quoting Ventura Content, Ltd. v. Motherless, Inc., 885 F.3d 597, 609 (9th Cir. 2018), cert. denied.). “Actual knowledge,” the court reasoned, “must mean something more than simply knowledge of the underlying transaction, which does not necessarily disclose the nature of the breach.” Id. at 1076. Therefore, Sulyma’s knowledge regarding the Fund’s allocations could not be inferred from Intel’s disclosures.

The court noted its split with the Sixth Circuit’s holding in Brown v. Owens Corning Investment Review Committee, 622 F.3d 564, 571 (6th Cir. 2010). In Brown, the Sixth Circuit held that “when a plan participant is given specific instructions on how to access plan documents, their failure to read the documents will not shield them from having actual knowledge of the documents’ terms.” Id. The Ninth Circuit disagreed with this reasoning, stating that plan participants under Brown are charged with constructive knowledge, not actual knowledge. Sulyma, 909 F.3d at 1076. Constructive knowledge is insufficient to trigger the statute of limitations because Congress specifically amended ERISA to repeal it from section 1113(2). Id.

Finally, the court rejected Intel’s argument that there are “strong policy reasons” to concluding that the actual knowledge standard has a broader meaning. Id. The court disagreed, positing that Sulyma could just as easily argue policy reasons favoring a narrow interpretation of the actual knowledge standard to “promote fiduciary accountability.” Id. The court declined to insert itself in the policy debate, instead leaving it to Congress to decide. Therefore, the Ninth Circuit held that for a defendant to prevail on a statute of limitations defense on a section 1104 claim, “[it]must show that there is no dispute of material fact that the plaintiff was actually aware that the defendant acted imprudently.” Id.

The Sulyma decision is significant because it prevents fiduciaries from prematurely starting the statute of limitations by inundating an employee with lengthy plan disclosures and later arguing that the employee was on notice of potential ERISA violations. While it is important to review documents impacting major financial decisions, employees may not know that a fiduciary has breached its duty of care until the consequences materialize. This decision provides further clarity to ERISA litigants and levels the playing field for employees who discover a breach of fiduciary duty years after receiving plan documentation.

Breach of Fiduciary Duty under ERISA: Making the Insurer or Plan Administrator Responsible for their actions towards a Plan’s Participants and Beneficiaries

In a previous blog, we addressed the doctrines of equitable estoppel and waiver when the Employee Retirement Income Security Act of 1974 (“ERISA”) governs their insurance or pension plan. As we explained, both doctrines provide an insured with methods of forcing an insurance company to honor its word and previous conduct. However, insureds often have difficulty invoking the doctrines. ERISA governs a wide variety of plans that provide life insurance, disability insurance, accidental death and dismemberment insurance and pension benefits. Given the challenges of invoking equitable estoppel and waiver in the ERISA context, do plan participants and their beneficiaries have other ERISA specific tools to force insurers to honor their word and previous conduct? Luckily, they do. A lawsuit for breach of fiduciary duty can sometimes achieve nearly identical results as waiver and equitable estoppel, but with less difficulty.

ERISA provides for various equitable remedies, including surcharge. See CIGNA Corp. v. Amara, 563 U.S. 421, 441 (2011). Section 502(a)(3) of ERISA authorizes plan participants and beneficiaries to seek equitable relief for ERISA violations. The Supreme Court examined this provision in Amara, supra. The Amara court’s interpretation of Section 502(a)(3) provides courts with broad powers to help insureds with problematic plan and claims administrators (normally employers and insurers).

In Amara, several CIGNA employees sued CIGNA for altering the CIGNA Pension Plan. Before the alteration, the pension plan had provided employees with a calculated annuity based on preretirement salary and length of service. The new pension plan provided a lump sum cash balance based on a defined annual contribution from CIGNA. The employees claimed that the new plan provided them with less generous benefits. They also asserted that CIGNA had not given them proper notice of the changes.

CIGNA first notified the employees of the change to the pension plan in a November 1997 newsletter. In the newsletter, CIGNA explained that the new plan would be an account balance system. The newsletter stated that CIGNA would explain the new plan at some undetermined date in 1998, but that the new plan would take effect on January 1, 1998. To employees who were already entitled to pension benefits, the new plan gave the employees a lump sum value for their years of service, discounted to its present value.

The employees sued CIGNA. The district court determined that the initial descriptions of the new plan misled CIGNA’s employees and was incomplete. The November 1997 statement claimed that the new plan would “significantly enhance” the retirement benefits program and would improve retirement benefits. The plan was to provide the “same benefit security” but with “steadier benefit growth.” Id. at 428. CIGNA also claimed that it would not benefit from any savings by implementing the new plan. The district court found all of these statements to be false and violations of provisions of ERISA that require a plan administrator to provide accurate and comprehensive statements such that the average plan participant understands their rights under a plan.

The district court held that ERISA Section 502(a)(1)(B) provided it with the legal authority to reform the plan for the benefit of the employees. Section 502(a)(1)(B) provides that a plan participant can bring an action to recover benefits due under an ERISA plan. The district court modified various portions of CIGNA’s new pension plan to provide the employees with the benefits to which it held they were entitled.

The court considered relying upon ERISA Section 502(a)(3) for its authority to modify the pension plan, but concluded that, under then Supreme Court precedent, Section 502(a)(3) did not provide the necessary authority. Section 502(a)(3) explains that a claim may be brought:

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.

CIGNA appealed the district court’s ruling. The Second Circuit affirmed the ruling in a summary opinion. CIGNA petitioned the Supreme Court, and the Supreme Court agreed to hear the petition.

The Supreme Court first analyzed Section 502(a)(1)(B). It determined that, in fact, Section 502(a)(1)(B) did not provide a district court with the authority to alter a plan. However, the Supreme Court determined that section 502(a)(3) provided the necessary authority. The Supreme Court explained that, “appropriate equitable relief” means the traditional equitable powers of a court. Courts’ traditional equitable powers included special remedies against trust fiduciaries who fail to properly administer a trust. ERISA plans are treated as trusts. As such, the current matter before the Supreme Court was one that traditionally involved an equitable suit against a trust’s administrator. A court’s equitable powers include such remedies as injunctions, reformation of contracts, equitable estoppel and equitable surcharge. Surcharge is the “power to provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment.” Id. at 441. The Supreme Court concluded that section 502(a)(3) provided the necessary authority for the district court’s actions. See id. at 441-42.

The Supreme Court then addressed what standard would apply to a district court’s invocation of its equitable powers. ERISA does not provide a standard. The Supreme Court noted that only certain remedies traditionally required detrimental reliance, the reliance on a party’s assertions to the suing party’s detriment. For example, detrimental reliance is an element of equitable estoppel, but not the reformation of a contract or surcharge.

The Supreme Court determined that to establish surcharge, a party need establish, by a preponderance of the evidence, that the plan beneficiary suffered actual harm due to a fiduciary’s breach of their duties. The Supreme Court remanded the matter for further proceedings.

As we previously noted, insureds have difficulty invoking the doctrines of equitable estoppel and waiver. However, that does not mean that insureds lack recourse against an insurer’s misconduct. An insurer’s actions may constitute a breach of fiduciary duty. If so, the insured may have a much simpler time establishing the insurer’s impropriety in court via a breach of fiduciary duty claim.

Do Arbitration Clauses in Employment Contracts Automatically Preclude Employees From Litigating ERISA Claims?

Many times, employees must sign written employment contracts before beginning a new position. These contracts generally set forth the terms of the relationship between the employer and employee. They also establish both the rights and responsibilities of the two parties. Employers often include an arbitration clause in their employment contract. This means that any disputes that arise between the employer and employee must be settled through arbitration, rather than through the courts.

But what happens when an employee sues his employer not on his own behalf, but on behalf of another entity for claims that the employee cannot bring in his individual capacity? For instance, in the context of ERISA, employees who participate in an employer-sponsored ERISA plan can bring a claim for breach of fiduciary duty on behalf of the ERISA plan against the employer. If the employee signed an arbitration agreement, does that preclude the employee from litigating this particular claim in court?

The Ninth Circuit Court of Appeals recently addressed this issue in the matter of Munro v. University of Southern California, No. 17-55550 (9th Cir. July 24, 2018). In Munro, nine current and former employees of the University of Southern California (“USC”) brought suit against their employer for breach of fiduciary responsibility in the administration of two ERISA plans offered by the employer (collectively, the “Plans”). The relief sought by the plaintiffs included the following: a determination as to the method of calculating losses; removal of breaching fiduciaries; a full accounting of Plan losses; reformation of the Plans and an order regarding appropriate future investments

Since the plaintiffs/employees all signed arbitration agreements as part of their employment contracts, USC filed a motion to compel arbitration, arguing that the arbitration agreements bar the plaintiffs from litigating the claims at issue. The district court denied USC’s motion and ruled that the arbitration agreements, which the employees entered into in their individual capacities, do not bind the Plans because the Plans did not themselves consent to arbitration of the claims. The Ninth Circuit upheld the district court’s ruling, finding that the claims for breach of fiduciary duty fall outside the scope of the arbitration agreements. In reaching its decision, the court turned to the language of the arbitration agreements, which state that the parties agreed to arbitrate “all claims…that Employee may have against the University or any of its related entities…and all claims that the University may have against Employee.” The court noted that this language does not extend to claims that other entities have against the University.

The Munro court concluded that the ERISA claims for breach of fiduciary duty were not claims that the “Employee may have against the University or any of its related entities.” Rather, the employees brought the claims on behalf of the Plans, and, since the Plans never consented to arbitration of the claims, the arbitration provision did not apply in this instance. In reaching its conclusion, the court looked to the case of United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017), which dealt with a similar issue, specifically, whether a standard employment arbitration agreement covered qui tam claims brought by the employee on behalf of the United States under the False Claims Act (“FCA”). The court in Welch found that because the underlying fraud claims asserted in a FCA case belong to the government and not to the employee, the claims were not claims that the employee had against the employer and therefore were not within the scope of the arbitration agreement. Welch, 871 F.3d at 800 & n.3. In Munro, the Ninth Circuit found similarities between the type of claim brought in Welch and the ERISA claims at issue in Munro. Specifically, the court noted that the ERISA plaintiffs did not seek relief for themselves, but rather sought recovery for injury done to the Plans. This was evident in the relief sought by the plaintiffs, which included removal of breaching fiduciaries, a full accounting of Plan losses, and reformation of the Plans. Furthermore, since the Plans were not parties to the arbitration agreements between the employer and employees, and therefore never consented to arbitration, the court could not compel arbitration in this instance.

The issue of whether a party can be compelled to arbitrate an ERISA claim where the party did not sign an arbitration agreement arose in a prior Ninth Circuit decision, Comer v. Micor, Inc., 436 F.3d 1098 (9th Cir. 2006). The plaintiff in Comer participated in an ERISA plan offered by his employer. The plan trustees retained a company, Salomon Smith Barney, Inc. (“Smith Barney”) to provide investment advice. The plan and Smith Barney entered into an investment management agreement that contained an arbitration clause. After Comer sued Smith Barney for breach of fiduciary duty under ERISA, Smith Barney moved to compel arbitration. The court found that pursuant to ordinary contract and agency principles, Comer could not be bound to the terms of a contract he did not sign and could not enforce. Therefore, the arbitration agreement did not apply to Comer’s ERISA claim. The same argument could be made in Munro, where the Plans were not signatories to the individual employment contracts and, therefore, were not bound by the arbitration agreements.

In summary, even though an employee has signed an employment contract containing an arbitration provision, this does not necessarily preclude the employee from bringing a lawsuit against his employer for ERISA violations when the employee is suing on behalf of the ERISA plan and not simply in an individual capacity. In such cases, the claims belong to the ERISA plan itself and, if the plan did not consent to arbitration, then this opens the door for the employee to bring his ERISA breach of fiduciary duty claim in federal court.

Multi-Million Dollar Disgorgement Award Struck Down in Rochow – But the Disgorgement Remedy May Still Be Alive

In December 2013, we published an article highlighting the Sixth Circuit Court of Appeals’ bold decision to award the plaintiff disability benefits plus $2.8 million in disgorged earnings, as a potential “game-changer” in Employee Retirement Income Security Act of 1974 (“ERISA”) litigation—that is, if it survived review. Rochow v. Life Ins. Co. of N. Am., 737 F.3d 415 (6th Cir. 2013) (“Rochow I”). Alas, the Sixth Circuit Court of Appeals vacated the decision in February 2014 and stayed the case. Rochow v. Life Ins. Co., 2014 U.S. App. LEXIS 3158 (6th Cir. Feb. 19, 2014) (“Rochow II”). Finally, in March 2015, the Court of Appeals issued an en banc decision vacating the disgorgement award and remanding the case for a review of prejudgment interest. Rochow v. Life Ins. Co. of N. Am., 2015 U.S. App. LEXIS 3532 (6th Cir. 2015) (“Rochow III”). The Court held that because the plaintiff was adequately compensated by an award of the insurance benefits, attorneys’ fees and possible prejudgment interest, that in this case, disgorgement was not necessary to make the plaintiff whole. Although this decision is disheartening to claimant’s attorneys eager to test the limits of ERISA remedies, a careful reading of Rochow III reveals that the Sixth Circuit does not entirely foreclose disgorgement as an appropriate remedy under ERISA. Moreover, the concurring and dissenting opinions provide additional guidance for future ERISA claimants who suffer injuries and seek equitable remedies beyond their policy benefits.

Briefly, the original suit involved Daniel Rochow, an executive who applied for, and was denied, long-term disability benefits after being diagnosed with a severely debilitating brain infection. He brought suit under ERISA for the insurer’s failure to pay benefits and breach of fiduciary duty. The district court held the insurer’s denial was arbitrary and capricious, and on appeal, awarded $3.78 million to the estate, $910,629 for Rochow’s disability benefits and $2.8 million to disgorge the insurer’s profits based on return on equity as “appropriate equitable relief” under 29 U.S.C. section 1132(a)(3) (Rochow I). This award was upheld by the Court of Appeals under the theory of unjust enrichment in Rochow I, but vacated in Rochow II. Thus, the stage was set for Rochow III.

Rochow III addressed whether Rochow was entitled to recover benefits under both ERISA section 502(a)(1)(B) and equitable relief under section 502(a)(3). The Court explained:

A claimant can pursue a breach-of-fiduciary-duty claim under § 502(a)(3), irrespective of the degree of success obtained on a claim for recovery of benefits under § 502(a)(1)(B), only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate.

The court noted that both of Rochow’s claims were based on the same underlying “injury” (the insurer’s failure to pay benefits), and an award granting him these benefits plus attorneys’ fees did make him whole. Accordingly, the court vacated the disgorgement award under section 502(a)(3).

Of note, the Rochow III dissent sends a strong signal that the disgorgement issue is far from settled, and offers insureds guidance for future ERISA claims. First, Circuit Judge Helene White notes that although she agrees with the majority decision that disgorgement was not adequately supported, she would allow consideration of a refashioned disgorgement remedy on remand. Significantly, Judge White points out that the justices “all appear to agree disgorgement of profits is a potential remedy under ERISA.” Moreover, Judge White disagrees that disgorgement requires two separate injuries—the inquiry should be whether other equitable relief is appropriate under the circumstances, and the extent to which disgorgement duplicates the benefits-denial claim is one factor in this inquiry. Indeed, even if Rochow recovered his benefits and attorneys’ fees, other equitable relief may be appropriate—as evidenced by the fact that the majority permitted an interest award. Judge White underscores the Court of Appeal did not discern why one equitable remedy (interest) was appropriate, but another (disgorged profits) was not. Finally, Judge White suggested that disgorgement may be appropriate where an insurer’s denial was based on “impermissible considerations” such as “an organizational policy to delay paying valid claims for as long as possible” or if disgorgement was necessary to ensure proper claims processing in the future.

The dissent by Circuit Judge Jane Stranch held disgorgement was appropriate because Rochow brought two distinct claims (to recover plan benefits and for an accounting and disgorgement of profits wrongfully earned through the insurer’s breach of its fiduciary duty) and suffered two distinct injuries (the insurer’s denial of his disability benefits, and breach of its fiduciary duties). Specifically, the insurer engaged in “deliberate and willful wrongful acts” to deny Rochow’s claim. This denial allowed the insurer to retain substantial funds rightfully due to Rochow in its corporate account and earn millions in profits during a seven-year period. Ultimately, the dissent held that the majority mischaracterized the Rochow’s injuries and disgorgement was a proper remedy.

Although Rochow III is undeniably a victory for insurance companies, the strong concurring and dissenting opinions reveal that the Court did not foreclose the possibility of a disgorgement award. However, insureds may have to show a distinct injury or “impermissible considerations” at the hands of the insurance company such that payment of their claim is insufficient to make them whole. Indeed, the takeaway from Rochow III appears to be the Sixth Circuit reassuring insureds, better luck next time. This issue has not been resolved in the Ninth Circuit. Maybe there will be better luck next time.

Standing Spine(dex) Adjustment – Ninth Circuit Finds Healthcare Providers Have Article III Standing in Denial of Benefit Claims Under ERISA

A universal part of the American medical experience is paperwork. Everyone is familiar with visiting a healthcare provider for the first time, filling out history forms and signing pages of documents that they either do not understand or do not care about. The Ninth Circuit recently grappled with a minimally explored legal issue surrounding one such document: whether a non-participant healthcare provider, as assignee of health plan beneficiaries under an assignment form, has Article III standing to bring a denial of benefits claim under ERISA.

Plaintiff Spinedex was a physical therapy clinic that had a number of patients covered by the defendant health plans although plaintiff was not a provider for plan participants. United Healthcare served as claims administrator for the defendant health plans and also insured many of those plans. New Spinedex patients were required to sign, among other things, an assignment of benefits form, an authorization of representation form, an enrollment form, and a financial policy form. The enrollment form included an acknowledgment that patients were liable for all costs of services provided; similarly, the financial policy explained patients would be responsible for any treatment costs not covered by their health plans.

The assignment form and authorization form, respectively, assigned Spinedex its patients “rights and benefits” under their respective health plans and authorized Spinedex to represent patients in administrative or civil proceedings that may arise in pursuit of benefits under their health plans. Most of the defendant health plans allowed written assignment of claims by their subscribers. Spinedex submitted claims to United after treating patients covered by the plans and United denied a number of such claims in whole or in part. Spinedex did not seek payment from its patients. These denials ultimately resulted in litigation when Spinedex sued United Healthcare and 44 health plans governed by ERISA for which United Healthcare was the claims administrator of the Plans. Under the Plans, for out-of-network care, Plan beneficiaries were required to request payment from their respective Plans. After defendants filed summary judgment based on lack of standing, the District Court granted summary judgment, holding, inter alia, that Spinedex lacked Article III standing to bring its denial of benefits and breach of fiduciary duty claims. Spinedex appealed.

The Ninth Circuit began by recognizing that, under ERISA’s civil enforcement provision, only participants, beneficiaries, fiduciaries, and the secretary of labor are empowered to bring a civil action. Spinedex was none of the above, thereby requiring it to “[bring a civil claim] derivatively, relying on its patients’ assignments of their benefits claims.” The defendants’ argument hinged on the first element of Article III standing: “[A] plaintiff must show (1) it has suffered an “injury in fact” that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical.” Spinedex PT v. United Healthcare, citing Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180–81 (2000).

Specifically, the defendants argued that the assigning patients have not suffered an “injury in fact” because Spinedex had not sought payment from its assigning patients for any shortfall. Therefore, defendants argued that since Spinedex stands in the shoes of, and can have no greater injury than, its assignors, Spinedex did not suffer injury in fact.

The court thoroughly dismantled this argument. It relied on at least one case from the Eleventh Circuit directly on point (the only other federal court to directly address this issue): HCA Health Services of Georgia, Inc. v. Employers Health Insurance Co., 240 F.3d 982 (11th Cir. 2001) (“HCA”). In that case, the defendant argued that the plaintiff lacked Article III standing because it failed to bill its patient-assignor for the denied benefits and thus lacked standing. The court in HCA disagreed and held that an assignee healthcare provider had standing to sue for recovery of benefits.

The Ninth Circuit also compared the present case to the Supreme Court’s decision in Sprint Communications Co. v. APCC Services, Inc., 554 U.S. 269 (2008). In that case, payphone operators had assigned third party aggregator companies their right to sue long-distance carriers for money owed, with an agreement that the aggregators would pay the proceeds of the suits back to the operators, minus a small fee. Sprint Communications was decided in a five-four split, with the dissent raising concern that the assignee had no stake in the outcome of the litigation beyond their fee. Here, Spinedex had an interest because its “patients assigned the entirety of their claims against the Plans, and Spinedex, as assignee, is permitted to keep all amounts recovered in suits brought on those claims.”

The defendants in Spinedex insisted that the plaintiff’s choice to not seek payment from the patients meant that those patients, as assignors, suffered no injury in fact after they assigned their rights. The court disagreed, stating “the patients’ injury in fact after the assignment is irrelevant.” Spinedex only took the rights the assignors had at the time, which included the right to seek payment directly from the health plans for charges by non-participant health care providers. Spinedex’s decision to not pursue its legal rights against its patients for payment did not affect it’s right to recover from the defendants.

The Ninth Circuit did not agree with all of Spinedex’s arguments, however. The court affirmed that the anti-assignment clause in one of the health plans precluded an assignment of benefits from the plan’s beneficiaries to Spinedex. The court also rejected Spinedex’s argument that the “assignment of rights and benefits” included the right to bring claims for breach of fiduciary duty, citing that the context of the agreement appears limited to issues of payment.

This decision is well reasoned and allows providers who have performed valuable services for plan participants to be paid directly from the ERISA plans that insure their patients and does not force the often needless action of actually seeking payment from them. Limiting physicians’ first recourse to their patients would have chilling effects both on providers and plan participants. Participants may forgo or delay vital healthcare because they cannot finance or they cannot pay for their care, and providers may limit their care to those participants whose health plans have previously paid properly assigned healthcare claims or participants who are able to first to pay for the care. But, these providers must first check the plans’ terms to assure themselves that they do not contain anti-assignment clauses

Get the Answers and Assistance You Need