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22 April 2010

US Supreme Court Releases Opinion in Conkright v. Frommert

Many employee pension plans are regulated by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq. ERISA permits plan participants to file an action in federal court if they are aggrieved by a decision of the plan administrator. The default rule under ERISA is that the administrator’s interpretation of a plan, including benefit determinations under that plan, is subject to de novo judicial review. In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), however, the Supreme Court held that if the plan grants the administrator discretionary authority to interpret the terms of the plan, the administrator’s decisions are entitled to the deferential abuse of discretion standard of judicial review.

On April 21, 2010, Chief Justice Roberts, writing for a five-justice majority, held that a plan administrator’s decision otherwise entitled to deference under the Firestone standard continues to be owed judicial deference even if the administrator had erroneously interpreted the plan on a previous occasion and the administrator offered the new interpretation in the context of subsequent judicial proceedings.

The underlying dispute giving rise to the Conkright case concerned the computation of pension benefits for employees who had received lump-sum benefits upon their discharge, but who were later rehired. It was undisputed that under Firestone, the administrator’s decisions would normally be entitled to deference since the plan contained a discretionary clause.

Initially, the plan administrator interpreted the plan in a way that reduced the benefits paid to returning employees to account for the lump-sum distributions that they had already received. This interpretation was held to be unreasonable by the Second Circuit. On remand, the district court declined to accord deference to the plan administrator’s newly proposed interpretation of the plan and imposed a benefits formula of its own devising. The Second Circuit affirmed, concluding that a court need not apply the deferential standard of review otherwise mandated by Firestone when the administrator has previously construed the identical plan provision in violation of ERISA.

The Supreme Court disagreed. Firestone, the Court explained, set forth a generally applicable standard of deference that was not affected by the fact that the administrator had made a “single honest mistake” in interpreting the plan. Slip op. 1. Looking to traditional trust law principles, which guide courts in construing ERISA’s remedial scheme, the Court considered it “doubtful” that a settlor who created a trust granting interpretative discretion to the trustee would want the “trustee divested entirely of that discretion simply because of one good-faith mistake.” Id. at 6-7. Moreover, ERISA’s “careful balancing” between the goal of protecting employees’ expectations and the goal of encouraging employers to provide benefits in the first place would be disrupted by routinely stripping plan administrators of the deferential Firestone standard of review. Id. at 9. Employers faced with expensive litigation and a “patchwork of different interpretations of a plan” might well cease offering benefits altogether. Id. at 10.

Justice Breyer wrote a dissenting opinion joined by Justices Stevens and Ginsburg. (Justice Sotomayor did not participate.) The dissenting justices took issue with how the majority characterized traditional trust law principles. They argued that once there has been found to be an abuse of discretion on the trustee’s part, the court has the discretion to fashion an appropriate remedial decree. According to the dissent, even if the court might ordinarily permit the administrator to exercise discretion anew, it is not absolutely “required to defer to a trust administrator’s second attempt at exercising discretion.” Slip op. 7 (Breyer, J., dissenting).

The practical impact of the Court’s decision in Conkright is significant. Because de novo judicial review increases the likelihood that otherwise reasonable decisions will be overturned in close cases, the degree of deference, if any, given to a plan administrator’s interpretation can mean the difference between massive liability and no liability at all. Judicial deference also promotes efficiency by encouraging benefits disputes to be resolved in the first instance through internal administrative proceedings rather than litigation. By extending a deferential standard of review to subsequently advanced plan interpretations, even after a judicial rejection of the initial interpretation, today’s decision should offer some comfort to employers that provide ERISA-governed benefits plans and to those who administer them.

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