By: Robert McKennon

It is no secret that employee benefit plan administrators use the Employee Retirement Income Security Act of 1974 to shield themselves from liability for their mistakes and transgressions with respect to employee benefits. They may make misrepresentations about the payment of medical, life, disability or pension benefits upon which plan participants rely. These plan administrators have a fiduciary obligation to the plan and to plan members to act and communicate honestly about the benefits they provide.  What happens when a plan administrator unintentionally misrepresents that plan participants will receive medical insurance for life if they retire from their employment in good standing, although the employee plan documents state that the plan does not provide lifetime benefits? Do the plan documents control?

On Sept. 13, the 9th U.S. Court of Appeals issued an important ruling under ERISA in Warmenhoven v. NetApp, Inc., 2021 DJDAR 9537, affirming in part and vacating in part the district court’s summary judgment in favor of defendants on plaintiffs’ claims under 29 U.S.C. Sections 1132(a)(1)(B) and 1132(a)(3). Plaintiffs alleged that termination of the NetApp Executive Medical Retirement Plan violated ERISA because plaintiffs, who were plan participants, had been promised lifetime benefits. The decision is important because it restated 9th Circuit authority that there is no scienter requirement for breach of fiduciary claims and, importantly, continued to expand equitable remedies available for breach of fiduciary claims under ERISA.

The Warmenhoven court held that because there was a genuine dispute of material fact as to whether NetApp incorrectly represented to plan participants that its plan provided lifetime health insurance benefits, Warmenhoven’s fiduciary duty claim survived summary judgment. There was a genuine issue of fact as to whether NetApp, Inc. breached its fiduciary duty by misrepresenting that the plan would provide lifetime benefits even though the terms of the plan included no such guarantee and even though NetApp could normally terminate the plan at any time.

Warmenhoven was the former CEO of NetApp and was CEO from 1994 to 2009 and executive chairman of its board of directors from 2009 to 2014. In 2003, Warmenhoven inquired about the creation of an executive retiree health plan, and such a plan was adopted by the board’s compensation committee in May 2005. In November 2015, the compensation committee decided to close the plan to new participants and in April 2016, it decided to terminate the plan altogether with an amended plan that would reimburse participants for the cost of purchasing health insurance on their own for a limited time. Warmenhoven and other participating retirees opposed the amended plan. This lawsuit followed.

As the court noted, “the default rule under ERISA is that employers my freely terminate welfare benefit plans like the Plan.” Warmenhoven claimed that NetApp had promised him that his health insurance benefits would continue for his lifetime relying primarily on representations made by NetApp in a series of PowerPoint presentations made to plan participants. An April 2005 PowerPoint indicated that the plan would provide certain retiring executives with medical coverage “as a fully insured plan” and represented that any company acquiring NetApp would have to agree to provide equivalent benefits “for the lives of the eligible employees.”

A March 2014 version of the PowerPoint more clearly “promised that the ‘Plan provides medical benefits for the retiree’s lifetime’ and that ‘[n]o retiree contributions [are] required.’” In addition to the PowerPoints, NetApp’s public filings contained disclosures that the plan was required to provide lifetime health care benefits to participants.

The certificates of coverage for the plan were prepared yearly by NetApp’s plan administrator CIGNA from its inception to 2012 and then by CIGNA’s replacement, UnitedHealthcare, from 2013-2016. The certificates of coverage all included at least one provision granting NetApp the authority to terminate benefits under the plan at any time — directly contradicting the promises in the PowerPoints of lifetime benefits.

Warmenhoven and six other retirees brought suit asserting two claims under ERISA: (1) that the PowerPoints themselves operated to vest lifetime benefits and sought recovery under Section 1132(a)(1)(B); and (2) that NetApp had breached its fiduciary duties by misrepresenting that the plan provided lifetime benefits, and plaintiffs were entitled to equitable remedies under Section 1132(a)(3). The district court granted summary judgment in favor of NetApp on both claims. Warmenhoven was the only plaintiff who appealed.

The court quickly dismissed the legal claim under Section1132(a)(1)(B) based on controlling circuit authority which requires that any change to the vesting schedule from the default position such that the plan can be terminated or amended at any time must be in writing in a plan document, citing Cinelli v. Security Pac. Corp., 61 F.3d 1437, 1441 (9th Cir. 1995).

The court then examined Warmenhoven’s equitable claim under Section 1132(a)(3), in which he claimed that if the PowerPoints did not vest lifetime benefits, he was entitled to equitable relief based on NetApp’s misrepresentation of plan benefits.

The court noted that a claim under Section 1132(a)(3) has two elements: (1) that there is a remediable wrong, i.e., that the plaintiff seeks relief to redress a violation of ERISA or the terms of a plan; and (2) that the relief sought is appropriate equitable relief.

The Warmhoven court had no difficulty finding that Warmenhoven had presented evidence of a “remediable wrong” sufficient to overcome summary judgment. Warmenhoven claimed that a named fiduciary misrepresented the terms of the plan by stating that the plan provided lifetime coverage. The court explained that prevailing circuit authority, Barker v. American Mobil Power Corp., 64 F.3d 1397, 1403 (9th Cir. 1995), held that “’fiduciaries breach their duties if they mislead plan participants or misrepresent the terms or administration of a plan.’” The court then examined the U.S. Supreme Court’s ruling in Varity Corp. v. Howe, 516 U.S. 489 (1996), which held that a plan fiduciary violated its fiduciary duties by intentionally deceiving plan beneficiaries to save the plan sponsor money at the expense of the plan beneficiaries.

Although Varity involved an intentional breach of fiduciary duty by a named fiduciary, the court noted that intent to mislead plan participants is not required under current circuit law. The court found that the district court erred in finding that NetApp did not breach a fiduciary duty because it only made honest statements regarding its intention to provide lifetime benefits. The court explained that under King v. Blue Cross & Blue Shield of Ill., 871 F.3d 730, 744 (9th Cir. 2017) and Mathews v. Chevron Corp., 362 F.3d 1172, 1183 (9th Cir. 2004), the fiduciary duty of loyalty is rooted in trust law, not tort law, and accordingly there is no reason to transplant the element of scienter from the law of torts.

The court noted that its decision in Mathews followed a line of cases from other circuits that do not require a showing of intent. Specifically, the Mathews court followed 6th Circuit precedent in James v. Pirelli Armstrong Tire Corp., 305 F.3d 439 (6th Cir. 2002). In James, company management made repeated oral promises to prospective retirees that their benefits would continue unchanged both during retirement and during their lifetimes. After the plaintiffs retired, the company increased the costs of health care benefits. The James court held that the company thereby breached its fiduciary duty under ERISA Section 1104(a)(1). The court did not address whether Warmenhoven would be entitled to appropriate equitable relief to redress the alleged wrong — a requirement of an equitable claim under Section 1132(a)(3) — but instead left that issue for the district court to consider on remand.

Warmenhoven is the latest case from the 9th Circuit to expand equitable relief for plan participants and their beneficiaries under ERISA for breach of fiduciary duties.  This case reinforces existing law that imposes upon ERISA plan fiduciaries, such a plan sponsors and plan administrators, potential liability for their misrepresentations to employees who make important decisions based on these representations. This is the right result given that ERISA’s remedies are equitable in nature and drawn from the law of trusts, where strong fiduciary duties are imposed on those who are in a position of trust and responsibility.

Robert McKennon is a shareholder at McKennon Law Group PC. He specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.