Argument recap: Determining proper remedies under ERISA

JASON STEED DEC 1, 2010 4:08 PM

Ted Olson, for CIGNA, began by distinguishing the plan summaries from the plan itself, asserting that CIGNA’s changes to the plan itself were lawful—it was the summaries of the plan that violated ERISA, because they were inaccurate. Therefore the class’s remedy was under Section 502(a)(3), which provides equitable remedy for an ERISA violation—not under Section 502(a)(1)(B), which enables participants to recover plan benefits.

Justice Kagan pushed back on the distinction Olson was making, asking whether the summary wasn’t in fact part of the “range of documents associated with” the plan, or the “documents and instruments governing the plan.” Olson acknowledged that multiple instruments could create the plan itself, but he resisted Justice Kagan’s suggestion that the summary was one of them, pointing to statutory language that he believed indicated the summary was separate.

Justice Kagan responded by positing that, under the statutory language, the summary could actually include information that is not required to be in the other written instruments, and that together “they all somehow constitute the plan.” Olson again resisted, pointing to the statutory language and also to Curtiss-Wright, which Olson said referred to the summary as something separate from the plan itself.

Olson then asserted that the court below did not find that the summary was part of the plan, but that it was instead a modification of or an amendment to the plan. And he noted that the summaries themselves provided that if there was any discrepancy between the summary and the plan, the plan governs.

Justice Kagan again interjected, noting the oddity of this disclaimer given that ERISA requires the summaries to be consistent with the plan documents. Olson responded by summarizing his position: yes, the statute requires the summaries to have certain information; these summaries failed to satisfy ERISA requirements; therefore the proper remedy is under Section 503(a)(3). “Unless it’s a part of the plan,” said Olson, “you must go under (a)(3).”

Justice Kagan responded by saying that this was “the very question.”  She then suggested that Olson was “over-reading” Curtiss-Wright. Olson began to respond, but at this point Justice Breyer interrupted, saying “I thought we took the case to decide a different issue.”

As Justice Breyer framed it, the issue was this: if the remedy is, as Olson contends, indeed under Section 503(a)(3), “where equity is at issue”—and if the defective summaries were likely to cause harm—then is it “sensible” to require CIGNA to refute the class members’ claims of harm, case by case? “That seems sensible to me,” said Justice Breyer. “I would like to hear you explain why that isn’t sensible.”

Olson responded by rejecting the “likely harm” standard applied by the Second Circuit. Instead, Olson asserted that “detrimental reliance” is required. Justices Breyer and Ginsburg both suggested this was essentially captured within the “likely harm” standard. And Chief Justice Roberts expressed concerns about Olson’s formulation, noting that “the whole point of these plans” is to provide assurance that retirement is taken care of, and the detrimental-reliance standard “put that up in the air” by requiring people to wait and see whether they were harmed by relying on the defective summary. Justice Ginsburg also pointed out that the detrimental-reliance standard would destroy class status because individual issues would predominate.

Before Olson could respond to any of this, Justice Kennedy chimed in to ask what the “likely harm” standard means. Justice Scalia clarified—“Likely harm to whom? I think that’s the question”: Is the standard whether it was likely the whole class was harmed, or a significant number, or a majority?

Justice Breyer stepped in to say it wasn’t so hard: the class members share a set of characteristics and the court had decided those who have these characteristics (making them class members) were likely to be harmed. It was up to CIGNA, then, to show in each particular case that the individual wasn’t harmed.

Olson responded by saying that this “defies reality.” The differences in circumstances between the 27,000 class members were too many, and the only way they could have been harmed is if they had decided to leave the employ of the company.

Before Olson could sit down, Justice Kennedy asked one more question: “If you proceed under (a)(3), doesn’t Mertens bar the award of monetary damages?” Olson agreed it would. Justice Kennedy then expressed concern that this didn’t offer much—Olson was insisting the Court proceed under (a)(3), but then saying “you can’t get monetary damages” under (a)(3). Olson responded that “Congress made that decision.”

Stephen Bruce, for the class, opened by rejecting the detrimental-reliance standard as inconsistent with the statute. Justice Kennedy immediately interjected that he didn’t see how the defective summaries could be a basis for recovery, then, unless they were part of the plan itself—which would take the inquiry back to the opening exchange between Olson and Justice Kagan. Justice Alito then asked: If the summary is part of the plan, “where does the ‘likely harm’ standard come from?” If the summary is part of the plan, and it says you get benefits that aren’t in the written instrument, then you get the benefits under the summary—regardless of “whether there’s likely harm or reliance or anything else, right?” Bruce did not embrace Justice Alito’s formulation, instead responding that this was more like a “nondisclosure issue,” in which unfavorable provisions in the plan were not disclosed in the summary.

Chief Justice Roberts said that was a tough argument to make because “the whole point of a summary is not to disclose everything.” If not disclosing something can be a basis for a claim, then every summary either would provide a basis for a claim or would be a full repetition of the plan—and thus not a summary.

Bruce responded that the summary is one of the documents or instruments “governing” the plan. Justice Ginsburg then asked whether the summary governs the plan only when it is more favorable—or if the summary would still govern, even if it showed fewer benefits than the plan itself. Pointing to Curtiss-Wright, Bruce responded that an unfavorable plan term must be validly adopted and disclosed in accordance with ERISA. Here, in violation of ERISA, there were unfavorable terms that were validly adopted but not disclosed in the summary. Justice Kennedy asked whether there was a presumption, then, that everything in the plan was favorable—what if the summary understated the benefits? Bruce responded that ERISA is concerned with protecting employee rights and focused on losses of benefits. The problem here was that a loss of benefits was not disclosed in the summary.

Justice Breyer then turned the discussion to Section 204(h), which in his view was “the logical thing to govern this,” but he noted that perhaps the Court couldn’t “reach” that provision. Without Section 204(h), said Justice Breyer, there were just two choices: either (1)(B), treating the summary as part of the plan or like a contract, or (3), “in which case we are under equity.” Justice Breyer seemed to dismiss (1)(B) as raising too many “problems,” but he indicated that the class seemed to be “free and clear” under (3) if it could show reliance and harm—“and then we are back to what I thought we granted this for, which is why not say if harm is likely then the burden shifts [to CIGNA, to show case by case that class members weren’t harmed]?”

Bruce replied that such an approach is precisely what the Securities Act employs. Justice Breyer—and then Justice Kennedy—wanted to know if trust law would approach it in the same way. And in Justice Kennedy’s view, the government was “quite wrong” to suggest that this was part of the law of trusts. Bruce suggested there was commonality among securities cases, trust law, and what the Second Circuit was doing here. But Chief Justice Roberts suggested the inference of harm “would be much more obvious and follow more logically” in securities cases than it would in the trust context. Bruce then pointed out that in one of the Court’s first ERISA cases, Teamsters v. Daniel, the SEC considered pension plans to be a security and the Court concluded that the protections offered by securities laws were offered under ERISA.

Justice Alito then asked what a plaintiff or defendant would have to show if this were an individual action under (a)(3). “What would ‘likely harm’ mean in that context?” Bruce responded by suggesting that, if the individual might have acted differently, had he or she known about the provision, then there was “likely harm.” But the standard had to be objectively applied to the employee group—“in terms of the average plan participant.”

Justice Kennedy asked if Bruce’s position was that the summaries would become part of the plan and provide a basis for a class action if they varied from the written instrument to the detriment of the employee—even if there was no intent to mislead. Bruce replied that the prompt correction of any problem would exempt the defendant from liability. But here, CIGNA had made no correction even after twelve years. Bruce closed by saying unintentional errors should be promptly corrected, but “intentional errors should not be countenanced and here CIGNA was deliberately misleading employees.”

Deputy Solicitor General Edwin Kneedler, arguing as an amicus in support of the class, opened by asserting that benefits were like wages, and an employee should be able to recover them, if they are withheld, without any particularized showing of detrimental reliance.

Justice Kagan asked whether Kneedler viewed this as essentially a contract case or a trust case. Kneedler responded that it was “basically a contract case.” Justice Alito again asked “where does the ‘likely harm’ standard come from?” And Justices Scalia, Kennedy, and Breyer all seemed hostile to the notion that the summary should be treated as a contract. Justice Scalia echoed Justice Alito’s question about the origin of the “likely harm” standard, and Kneedler conceded it was “a formulation of the Second Circuit.” “That’s nice,” said Justice Scalia.

Justice Kagan then stepped in and asked what the analysis would look like if it were a trust issue. Kneedler suggested the question would be whether there was an affirmative representation or a failure to disclose. Justice Ginsburg asked whether the government put any weight on Congress insisting that participants get a copy of the summary, while imposing no such requirement with respect to the full plan, and Kneedler said that was “critical” to the government’s position. The summary is the only document that is given, said Kneedler; it is not an amendment to the plan—it is part of the plan. 

Justice Scalia pressed Kneedler on this distinction: if the summary contradicts the plan, and the summary governs, doesn’t this mean the summary amends the prior part? Kneedler replied, “it controls.” Justice Breyer then wanted to know if the summary controlled when it was less favorable. Kneedler responded that there are two documents that are part of the contract, and “it’s an effort to find out what the deal is.” In effect, whichever part of the contract is more favorable to the employee governs.

On rebuttal, Olson first pointed out that Section 204(h) was indeed unavailable as a basis for deciding the matter, because the district court rejected it. Then he reiterated that, to the extent the Court was concerned that an equitable remedy under (a)(3) was “empty” or insufficient, “that’s what Congress decided.”

Justices Scalia, Breyer, and Alito all seemed interested in why Section 204(h) was not applied. Olson tried to distinguish the summary from the type of “notice” to which Section 204(h) would apply; he then noted that the district court had determined that the summary had amended the plan.

Lastly, Justice Kagan expressed concern that Olson’s detrimental-reliance standard would require each employee to individually prove reliance, which would generate “an incredible windfall” to companies “that commit this kind of intentional misconduct”—because few people actually read these documents. Olson responded that employees might not have to show they actually read the summary to show reliance, that under trust law there is a requirement of loss, and that “every court has said that under (a)(3) equity requires detrimental reliance.”

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