General Publications April 8, 2015

“6th Circ. Rejection of Disgorgement Brings ERISA Relief,” Law360, April 8, 2015.

Extracted from Law360

Last year, we reported on the panel decision from Rochow v. Life Insurance Company of America, in which the Sixth Circuit affirmed a disgorgement award under Employee Retirement Income Security Act § 502(a)(3) totaling almost $3.8 million, in addition to requiring the insurer to pay individual disability benefits under § 502(a)(1)(B).[1] The panel opinion was noteworthy because damages in ERISA claims for benefits have long been limited to the benefits at issue, plus possibly interest and attorneys’ fees. Thus, the panel opinion dramatically expanded the type of relief available to those who claimed their ERISA benefits were improperly denied. However, on rehearing en banc, Judge David McKeague, who previously issued a dissenting opinion on the panel decision, delivered the majority opinion vacating the disgorgement award, while remanding to the district court for consideration of whether prejudgment interest is warranted under ERISA § 502(a)(1)(B).[2]

Procedural History

Daniel Rochow[3] was covered under a disability benefits program sponsored by his employer and insured by LINA. Rochow began to experience short-term memory loss, sporadic chills and sweating. As a result of his inability to perform his job, he resigned in January 2002. In February 2002, he was diagnosed with a rare and severely debilitating brain infection. Rochow filed a claim for disability benefits in December, but LINA denied the claim, stating that his employment ended before the disability began.

Following the exhaustion of his administrative remedies, Rochow filed suit in the U.S. District Court for the Eastern District of Michigan. The district court ultimately found that LINA acted arbitrarily and capriciously in denying Rochow’s claim for disability benefits and the decision was affirmed on appeal to the Sixth Circuit.

Back at the district court, the parties had numerous unresolved issues, including a dispute over whether Rochow was entitled to a disgorgement of profits allegedly earned on the money that should have been paid in disability benefits in addition to the award of disability benefits under the plan. Rochow asserted disgorgement was necessary to prevent LINA’s unjust enrichment resulting from profits it earned on the wrongfully retained disability benefits. The district court agreed and ordered LINA to pay a disgorgement award totaling almost $3.8 million.

LINA again appealed to the Sixth Circuit, arguing that the disgorgement award was inappropriate because equitable relief under ERISA § 502(a)(3) is available only when § 502(a) does not otherwise provide an adequate remedy. Since Rochow had been awarded the disability benefits at issue under § 502(a)(1)(B), LINA argued no further award was available under § 502(a)(3).

In a controversial decision issued last December, a panel of the Sixth Circuit affirmed the disgorgement award. The Sixth Circuit then granted LINA’s petition for rehearing en banc, vacating the panel’s decision and allowing all judges of the Sixth Circuit to consider this contentious case.

En Banc Majority Opinion

On rehearing en banc, the Sixth Circuit restored order for individual benefits cases by rejecting the disgorgement award as “an impermissible duplicative recovery.”[4] In doing so, the majority held that relief under ERISA § 502(a)(3) in benefits cases is available “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.”[5] Here, the majority determined Rochow had only suffered one injury — the denial of benefits — which “necessarily results in a continued withholding of benefits until the denial is either finalized or rectified.”[6]

The majority also found significant that “Rochow’s loss remained exactly the same irrespective of the use made by LINA of the withheld benefits.”[7] Instead of focusing on Rochow’s loss, the district court’s disgorgement award reflected concern that LINA was unjustly enriched, “a consideration beyond the ken of ERISA make-whole remedies.”[8] Because Rochow had an adequate remedy under § 502(a)(1)(B) for the denial of benefits, any further relief for the same injury was not available under § 502(a)(3). However, the majority did remand for the district court to consider an award of prejudgment interest, so long as it was not “at an excessive rate” or “so high that the award amounts to punitive damages.”[9]

Judge McKeague’s majority opinion was joined by eight judges from the 16 judges at the court. At the other end of the spectrum, five judges joined a dissenting opinion issued by Judge Jane Branstetter Stranch. And in the middle, Judge Helene White joined in part both the majority and dissenting opinions.

Dissenting Opinion

The dissenting opinion, authored by Judge Stranch, rejected the majority’s determination that Rochow suffered only one injury. Instead, “LINA injured Rochow in two distinct ways: by arbitrarily and capriciously denying his disability benefits claim and by breaching its fiduciary duties to him.”[10] The dissent also determined that remedies under both ERISA §§ 502(a)(3) and (a)(1)(B) “are necessary, working in tandem, to make Rochow whole for LINA’s ERISA violations.”[11]

In particular, the dissent found a disgorgement award “appropriate” based on “the district court’s findings concerning LINA’s malfeasance, the length of the delay in paying benefits due, and the extraordinary profit LINA reaped from its malfeasance.”[12] The dissent also suggested that LINA’s actions were not only a breach of fiduciary duty, but also prohibited self-dealing under ERISA § 406(b).

Judge White’s Opinion

Judge White’s concurring opinion split the difference between the majority and dissenting opinions. In doing so, Judge White claimed “[t]here is less light between the two opinions than might appear on the surface.”[13] Judge White stated she “would vacate the judgment on the basis that the order of disgorgement is not adequately supported,” but “would, however, permit consideration of a refashioned disgorgement remedy on remand if properly supported.”[14]

In reconciling the divided court’s opinions, Judge White noted that the majority opinion did not foreclose a disgorgement award and called the majority’s bifurcated standard (allowing a § 502(a)(3) claim when there is a separate injury or where the remedy under § 502(a)(1)(B) is inadequate) “confusing and unnecessary.”[15] Instead, Judge White opined that if the remedy under § 502(a)(1)(B) is adequate, there is no need for further relief even if there is a separate injury. Conversely, if the remedy is inadequate, the existence of a separate injury should not matter. Thus, Judge White would focus on whether § 502(a)(1)(B) provides adequate relief in a given case.

However, Judge White also expressed reservations regarding disgorgement awards in benefits cases, noting that any such award “should be premised on a finding that the decision to deny benefits was not only arbitrary and capricious but also based on impermissible considerations that call for an equitable judicial response geared toward deterring similar decision-making in the future.”[16] For example, disgorgement may be appropriate if there was an organizational policy to delay valid claims or repeated wrongful claims. Here, since the district court’s disgorgement award was focused on preventing LINA’s unjust enrichment rather than making Rochow whole, Judge White would remand for the district court to reconsider the disgorgement remedy under the proper standard.

Conclusion

With the Sixth Circuit’s majority opinion, ERISA administrators, employers and insurers can breathe a sigh of relief. The majority’s opinion follows the general rule that a § 502(a)(3) claim is not available in the typical ERISA benefits case because § 502(a)(2)(B) already provides an express remedy.[17] Further, the majority rejected the dissent’s suggestion that LINA’s failure to segregate the disability benefits claimed by Rochow constituted a prohibited transaction. The dissent’s view would create the possibility of a retroactive prohibited transaction, such that the violation could not be determined until a court ruled on the disability determination and could, as a practical matter, cause dramatic changes to how insured and self-funded plans handle reserves for disputed claims.

Despite the majority’s favorable decision, future plaintiffs are likely to look to the dissenting and concurring opinions to fashion § 502(a)(3) claims in routine benefits cases. To do so, plaintiffs will need to devise creative “injuries” or explanations of why relief under § 502(a)(1)(B) is inadequate to satisfy the majority’s requirement that additional relief is possible only when there is a separate injury or the afforded remedy is inadequate. Based on Rochow, this will require showing more than that the insurer profited from a delay (even a long delay) in paying the benefits. Of course, other circuits may consider this issue, and, to the extent there ends up being a split, the U.S. Supreme Court may ultimately need to address it. 


[1] Rochow v. Life Ins. Co. of Am., 737 F.3d 415 (6th Cir. 2013).
[2] Rochow, __ F.3d __, No. 12-2074 (6th Cir. Mar. 5, 2015).
[3] Rochow passed away in 2008 and representatives from his estate were substituted as the plaintiffs in this lawsuit. For consistency, all action taken on behalf of Rochow’s estate is referred to as action by Rochow.
[4] Id. at *4.
[5] Id. at *6.
[6] Id. at *7.
[7] Id. at *8.
[8] Id. at *4.
[9] Id. at *10.
[10] Id. at *17.
[11] Id.
[12] Id. at *28
[13] Id. at *13.
[14] Id. at *12.
[15] Id. at *14.
[16] Id. at *15.
[17] See Varity Corp. v. Howe, 516 U.S. 489, 514 (1996).

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