Court rules on deference for retirement plan administrators

By Anna Christensen
on Apr 24, 2010 at 9:41 am

Below, Martine Cicconi of Stanford Law School recaps Wednesday’s ruling in Conkright v. Frommert.  Martine’s preview and recap of the oral argument in the case are available here and here.  Check the Conkright v. Frommert (08-810) SCOTUSwiki page for additional information.

On Wednesday, the Court issued its opinion in Conkright v. Frommert, holding that a plan administrator’s interpretation of a retirement plan is entitled to deference, even when the administrator has previously offered an erroneous reading. Dividing on ideological lines, the Court reversed the Second Circuit, which had held that no deference was required when the administrator had misconstrued the plan at an earlier stage in the litigation.

In an opinion by Chief Justice Roberts, the Court began by noting that, because the text of ERISA is inconclusive, it should look to the principles of trust law to determine whether deference was appropriate. Under trust law, the Court found, whether deference to the administrator’s interpretation is warranted would depend on the terms of the plan itself:  when, as here, the plan requires deference, the court should act accordingly.

Deeming the Second Circuit’s approach a “one strike and you’re out approach,” the Court characterized the lower court’s decision as inconsistent with the purposes of ERISA, the terms of the plan, and the principles of trust law. Under doctrines of trust law, the Court concluded, a trial court should reject the administrator’s construction only if bad faith were shown. Moreover, the purposes of ERISA counseled in favor of deference. When enacting ERISA, the Court noted, Congress intended to encourage companies to establish retirement plans. As such, ERISA represents a “careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.” By permitting an employer to rely on the administrator for primary interpretive authority, deference to those interpretations preserves the “careful balancing on which ERISA is based.” Respect for the administrator’s view, the Court found, “promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation.” It also promotes predictability and uniformity in judicial decisions.

The Court dismissed as “overblown” the employees’ argument that its interpretation would would encourage employers to game the system by providing employers with an incentive to offer unreasonable constructions in the first instance. The Court explained that deference did not necessarily mean that the plan administrator’s construction would prevail on the merits; rather, it meant only that the plan administrator’s interpretation would be upheld if reasonable. Thus, deference would not encourage deceptive behavior or unfairly skew litigation in favor of employers.

Because it reversed the Second Circuit’s holding, the Court declined to reach the second question raised in the case – whether the court of appeals applied the appropriate standard when it reviewed the district court’s decision.

Justice Breyer filed a dissenting opinion, which was joined by Justices Stevens, and Ginsburg; Justice Sonia Sotomayor did not participate in the decision.  In his dissent, Justice Breyer argued that the majority’s reliance on the principles of trust law was misplaced. Far from demanding deference in all circumstances, Justice Breyer noted, trust law “imposes no such rigid or inflexible requirement.” Instead, it “grants courts the authority either to defer anew to the trustee’s discretion or to craft a remedy” when a trustee has abused its discretion with respect to his interpretation of the trust terms. Unlike the majority, moreover, Justice Breyer agreed with the employees that the Court’s holding would “create[] incentives for administrators to take ‘one free shot’ at employer-favorable plan interpretations.” Such incentives, Justice Breyer concluded, would not further Congress’s purpose of “promot[ing] the interests of employees and their beneficiaries in employee benefit plans.”