Amicus Curiae Brief — Firestone Tire & Rubber Co. v. Bruch
Supreme Court brief1989
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No. 87-1054
IN THE
Supreme Court of the United States
OcTOBER TERM. 1987
THE FIRESTONE TIRE & RUBBER CO., et al.,
Petitioners,
vs.
RICHARD BRUCH, ALBERT SCHADE,
LEONARD A. SMOLINSKI, et al.,
Respondents.
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
BRIEF OF THE
PLAINTIFF EMPLOYMENT LAWYERS ASSOCIATION
AS AMICUS CURIAE
SUPPORTING RESPONDENTS
JAMES J. GUZIAK
Of Counsel
2700 N. Main Street, Suite 535
Santa Ana, California 92701
(714) 547-5858
PAUL H. TOBIAS
Counsel of Record
TOBIAS & KRAUS
911 Mercanule Library Building
414 Walnut Street
Cincinnau, Ohio 45202
(513) 241-8137
Attorneys for Amicus Curiae
Plainuff Employment Lawyers Association
Lawyers Brief Service / Legal Publishers / (213) 383-4457 / (714) 720-1510
ee Oe ed
:
:
QUESTION PRESENTED
Does not the content, the legislative
history, and the overall purpose of ERISA
mandate, at a minimum, that all employee
benefit claim decisions falling outside
of the LMRA "collective bargaining"
context be subject to a non-deferential
judicial standard of review?
TABLE OF CONTENTS
Page
QUESTION PRESENTED ....... i
TABLE OF CONTENTS ....... ii
TABLE OF AUTHORITIES ...... iv
INTEREST OF AMICUS ....... 1
INTRODUCTORY STATEMENT ..... 2
SUMMARY OF ARGUMENT ...... 6
os © © @ © « ¢ © © «© e « 10
I. IN ENACTING ERISA, CONGRESS
SOUGHT TO REFORM EXISTING LAW
SO AS TO BETTER SAFEGUARD THE
WELL BEING AND SECURITY OF
WORKING MEN AND WOMEN. ERISA
IS TO BE BROADLY CONSTRUED SO
AS TO GIVE EFFECT TO THAT
PURPOSE. lS a a a a 10
II. ERISA's POLICY IS NOT FURTHER-
ED BY A DEFERENTIAL STANDARD
OF REVIEW. CONGRESS NEVER
INTENDED THAT SUCH A STANDARD
BE IMPORTED FROM THE COMMON
LAW OF TRUSTS. PRIOR CASES
ADOPTING SUCH A STANDARD
SHOULD BE REJECTED... .... 15
ii
:
5
Page
III. THE ARBITRARY AND CAPRICIOUS
STANDARD VIOLATES THE “PLAIN
MEANING" RULE OF STATUTORY
CONSTRUCTION. iT IS INCON-
SISTENT WITH ERISA's OVERALL
STRUCTURE AND LEGISLATIVE HIS-
TORY. THE COURTS HAVE STRUG-
GLED TO COPE WITH IT. THE
RESULT HAS BEEN A COMPLICATED
BODY OF CASE LAW, WITH MANY
EXCEPTIONS TO THE DEFERENTIAL
STANDARD. THE COURT SHOULD
RESTORE CERTAINTY AND UNI-
FORMITY TO THE LAW, BY ELIMI-
NATING THE ARBITRARY AND
CAPRICIOUS STANDARD. o 8 8 25
IV. A DEFERENTIAL STANDARD FAILS
TO MEET THE REASONABLE EXPEC-
TATIONS OF EMPLOYEES. IT
CREATES A DOUBLE STANDARD
THAT CONGRESS COULD NOT HAVE
ENVISIONED OR INTENDED. BENE-
FIT PLAN PARTICIPANTS AND
BENEFICIARIES END UP WITH
FEWER RIGHTS AND PROTECTIONS
THAN DO INDIVIDUALS WHO HAVE
SEPARATELY CONTRACTED FOR
PROTECTION THROUGH POLICIES
OF INSURANCE. ... + «© « « 34
CONCLUSION ... + + «© © © © « « 39
iii
~ tna
TABLE OF AUTHORITIES
Cases Page
Amato v. Bernard,
618 F.2d 559 (9th Cir. 1980) ... 23
Amato v. Western Union Int., Inc.,
773 F.2d 1402 (2d Cir.
1985) . + . . . . . . 7 . . 7 14-15,27
Bayles v. Central States,
Southeast, etc., 602 F.2d 97
(5th Cir. 1979) 7: . . > . o . . . 29
Blau v. Del Monte Corp., 748 F.2d
1348 (9th Cir. 1984), cert.
denied, 449 U.S. 1112. . 23,24,31,32
Calamia v. Spivey,
632 F.2d 1235 (5th Cir. 1980) ee Be
Dennard v. Richards Group, Inc.,
681 F.2d 306 (5th Cir. 1982) .. 2,31
Denton v. First National Bank,
765 F.2d 1295 (5th Cir. 1985) eo « a3
Donovan v. Mazzola,
716 F.2d 1226 (9th Cir. 1983),
cert. denied 464 U.S. 1040
(3d Cir. 1984) . + . 7 . . + 19,22
Ellenburg v. Brockway, Inc.,
763 F.2d 1091 (9th Cir. 1985) oa <i
iv
Page
Hayden v. Texas - U.S. Chemical Co.,
557 F.Supp. 382 (E.D.Tex.
1983). . . . . . . . . . . . . 29,30
In re Vorpahl
695 F.2d 318 (8th Cir. 1982) .. .- 23
Kann v. Keystone Resources, Inc.
Profit Sharing Plan, 575 F.Supp.
1084 (W.D.Pa. 1983) ee eee « es
Mason v. Continental Group, Inc.,
763 F.2d 1219 (llth Cir. 1985). » ae
Mass. Mutual Life Ins. Co. MA
Russell, 473 U.S. 134, 1
8.Ct. 3085 (1985) = 24,26,27,28
Metropolitan Life Ins. v.
Massachusetts, 471 U.S. 724,
105 S.Ct. 2380 (1985) ..-+-+ + + 26
Morgan v. Mullins,
643 F.2d 1320 (8th Cir. 1981) 5 « oe
Nachman Corp. v. PBGC, 446 U.S.
359, 100 S.Ct. 1723 (1980) ...- + 26
Pennsylvania, et al. v. Delaware
Valley Citizens' Council for
Clean Air, et al., U.S. ,
106 S. Ct. 3088 (1986)
("Delaware Valley I") «+++ + .25
Page
Pennsylvania, et al. v. Delaware
Valley Citizens' Council for
Clean Air, et al., _U.S.__,
107 S.Ct. 3078 (1987)
("Delaware Valley II") ... .
Pilot Life Ins. Co. v. Dedeaux,
U.S. , 107 S.Ct.
1549 (1987) . o + . . 7
Powell v. C. & P. Tel. Co. of
Virginia, 780 F.2d 419, 424
(4th Cir. 1985), cert. denied
476 U.S. 1170 (1986). ...
Rettig v. PBGC,
744 F.2d 133 (D.C. Cir. 1984) °
Shaw v. Deita Airlines, Inc., 463
U.S. 85, 103 S.Ct. 2890 (1983) ..
Short v. Central States Pension Fund,
729 F.2d 567 (8th Cir. 1984) ...
Smith v. CMTA-IAM Pension Trust,
746 F.2d 587 (9th Cir. 1984) ...
Sokol v. Bernstein,
803 F.2d 532 (9th Cir. 1986) ...
Struble v. New Jersey Brewery
Employee's Welfare Fund,
732 F.2d 325 (3d Cir. 1984) ee
vi
25
26
24
15
26
32
24
32
Page
Tomlin v. Bd. of Trustees of
Const. Laborers, 586 F.2d 148 '
(9th Cir. 1978) 8 . . > _ . . >. .
Wardle v. Central States Pension
Fund, 627 F.2d 820 (7th Cir. 1980) 2
ee ¥. + ‘Se o (ree cis 1983). »- « 24
Statutes
Labor Management Relations Act of 1947
29 U.S.C. 141 et seq. se e¢nee §
29 U.S.C. 186(c)(5) «© »- «+ «e+e « §
Employee Retirement Income Security
Act of 1974, as amended,
29 U.S.C. 1001 et. seq. “a ea i
29 U.S.C. 1001(b) - . 2S eres 6 ae
90 U.8.G. 2000(G) « ee eee o
29 U.S.C. 1104(a) so «© & 6 tebegpeeeer
99 U.8.€ 2008. « © ee © 8 8 0 6 ee
90 U.8.@. B209f@) «© « « es wo eo wo
el ee
vii
29 U.S.C. 1132(a) (1) (B) oe © « 6 * UG
29 3-e8eC- 1132 (f) . . . . . . . . 16
29 v8.6. 1132 (g) . . . . . . . . 25
Legislative Materials
H.R.Rep. No. 533, 93d Cong., lst
Sess. (1973), reprinted at 2 Leg.
Hist. of ERISA 2352 .... -10,11,22
S.Rep. No. 127, 93d Cong., lst
Sess. (1973), reprinted at 1
Leg. Hist. of ERISA 591... -10,11,22
S.Rep. No. 127, 93d Cong., lst
Sess. (1973), reprinted in 3
U.S. Code Cong. S. Admin. News
4854 . 7. . . . . 14
Other Authorities
S. Bruce, "Pension Claims: Rights and
Obligations," (BNA, 1988)
es 6 © «© «© « « 10°12,19,20,22,30-32,37
Couch on Insurance 2d (Rev. Ed.)
Section 79: 314-19 ......e..e-e 37
viii
Page
Hewitt Associates, "Salaried
Employee Benefits Provided by
Major U.S. Employers in 1986" . 34,35
Hewitt Associates, "Salaried
Employee Benefits Provided by
Major U.S. Employers: A
Comparison Study, 1981 through
1986" . . . . . . . . . . . . 35
1986 Johnson and Higgins Corporate
Health Care Benefits Survey . . 34,35
III Scott on Trusts, Section 187.2
at 1514 and n.2; Sections 227-
227.3, at 1805-12 . -«- «© «+ + «© + » -19
ix
INTEREST OF AMICUS*
Amicus Plaintiff Employment Lawyers
Association ("PELA") is a non-profit
organization. PELA has six hundred
fifty-six (656) members in forty-nine
(49) states who specialize in represent-
ing employees in civil litigation con-
cerning employment and labor matters.
PELA members regularly encounter issues
arising under the Employee Retirement
Income Security Act of 1974, as amended,
29 U.S.C 1001 et. seq. ("ERISA"). PELA
is therefore uniquely positioned to offer
practical insights on behalf of those for
whose benefit ERISA was enacted.
1 this brief was filed with the
consent of the parties. The evidence of
such consent is on file with the Clerk of
the Court pursuant to Rule 36 of this
Court.
INTRODUCTORY STATEMENT
This case presents important questions
about the scope of judicial review of
decisions on ERISA benefit plan claims.
Such claims include those for pensions,
disability benefits, health care bene-
fits, and for severance pay. Presently,
such claims are subject to a deferential
standard of review which places employees
and their beneficiaries at a distinct
disadvantage. To satisfy the "substan-
tial evidence" element of the standard,
2 under the standard, a decision
will be overturned only if it is
“arbitrary and capricious, (2) not
supported by substantial evidence, or (3)
erroneous on a question of law. E.g.,
Wardle v. Central States Pension Fund,
627 F.2d 820 (7th Cir. 1980); Dennard v.
Richards Group, Inc., 681 F.2d 306 (5th
Cir. 1982); and
Inc., 763 F.2d 1091, 1093 (9th Cir.
1985).
a benefit plan need only develop "such
relevant evidence as a reasonable mind
might accept as adequate to Support a
conclusion ...more than a scintilla but
somewhat less than a preponderance of
evidence ...such evidence as would be
sufficient to justify submission of the
issue to a jury." Tomlin _v. Bd. of
Trustees of Const. Laborers, 586 F.2d
148, 151 (9th Cir. 1978). Thus, a
decision can be upheld even if later
shown to be wrong, despite the resulting
injustice to the concerned claimant.
PELA supports the decision below to
adopt a "de novo" standard of review.”
The Third Circuit's opinion thoroughly
3 The decision was rendered by the
Third Circuit, reversing the District
Court. Said decision is reported at 828
F.2d 134.
analyzes the development of the "“arbi-
trary and capricious" standard and its
prior application to claims arising under
both the Labor Management Relations Act
of 1947, 29 U.S.C. 141 et seq. ("LMRA")
and ERISA. Its decision to reject said
deferential standard of review in certain
ERISA cases reflects a careful balancing
of policy considerations, which is
consistent with the overall Congressional
objectives in enacting ERISA.
The Third Circuit's analysis should be
extended beyond the "conflict of inter-
est" setting of this case. A non-
deferential judicial standard of review
should, at the minimum, be adopted for
all ERISA cases falling outside of the
context of
"collective bargaining"
benefit plans set up under Section
a. ee
ath DS
302(c)(5) of the LMRA, 29 U.S.C. Section
186(c) (5).
The Third Circuit has offered a
compelling analysis of why a deferential
standard of review may be appropriate
under the LMRA yet flawed under ERISA.
ERISA lacks the LMRA's built-in pro-
tections to police against abuses by
fiduciaries. Congress clearly intended
for civil actions to serve as ERISA's
policing mechanisms. Such actions cannot
serve this purpose, however, under the
arbitrary and capricious standard. It
unfairly insulates fiduciaries from
accountability in all but the clearest of
cases.
The Third Circuit's decision recognizes
the errors of prior decisions applying
the arbitrary and capricious standard.
This case now presents the Supreme Court
with an extraordinary opportunity to do
justice by exercising its supervisory
powers to similarly correct an unwise
trend to apply the deferential standard
of review in ERISA benefit cases.
SUMMARY OF ARGUMENT
l. It is the overriding policy of
ERISA to safeguard the well being and
security of working men and women. That
policy is not furthered by the arbitrary
and capricious deferential standard.
2. Congress never intended that a
deferential standard of review be
incorporated into ERISA from the common
law of trusts. In fact, the trust
relationships present in ERISA benefit
plans are significantly different from
those found in the common law. Contract
analysis is more appropriate.
3. ERISA lacks the LMRA's built-in
protections promoting impartiality. A
"de novo" standard of review is therefore
necessary, at least as to claims arising
outside of the LMRA collective bargaining
context, in order to safeguard the rights
and obligations created by ERISA.
4. The arbitrary and capricious
standard violates the plain meaning of
the "prudent man" standard and the
"exclusive benefit" rule of 29 U.S.C.
1104(a). It is inconsistent with the
overall structure and legislative history
of ERISA. Various cases have struggled
to cope with this inconsistency, and with
inequities resulting from strict adher-
ence to this product of judicial common
law. Numerous exceptions and exclusions
to the arbitrary and capricious standard
have therefore developed. While they are
understandable and just, these exceptions
and exclusions have created a “double
standard" that does little to foster
important societal needs for certainty
and uniformity of the law. It is time to
therefore make a clean break = and
expressly abandon the arbitrary and
capricious standard.
5. The arbitrary and capricious
standard works a substantial injustice
upon those for whose benefit ERISA was
enacted. Workers make substantial
contributions to the benefit plans in
which they are participants. These
include actual money payments and compen-
sation received in the indirect form of
benefit plan protections. The
ee mn lee Oh nde alll & Sete *
deferential standard has not satisfied
reasonable expectations of security and
protection that the benefit plans are
intended to provide. The deferential
standard also fosters unequal treatment
of the citizenry under the law. In the
non-pension context, benefit plan parti-
cipants and beneficiaries have far fewer
legal rights and protections with the
deferential standard than do individuals
who have privately contracted for their
Own protection through annuities or
policies of health and/or disability
insurance. A "de novo" standard would
help to put benefit plan claimants back
on an equal footing with the rest of
society.
ARGUMENT
I. IN ENACTING ERISA, CONGRESS SOUGHT
TO REFORM EXISTING LAW SO AS TO
BETTER SAFEGUARD THE WELL BEING AND
SECURITY OF WORKING MEN AND WOMEN.
ERISA IS TO BE BROADLY CONSTRUED SO
AS TO GIVE EFFECT TO THAT PURPOSE.
This brief relies upon a recent,
comprehensive reference study of ERISA,
of its legislative history, and of its
interpretive cases.* In discussing
ERISA's intended policy, the study
observes that Congress expressed
dissatisfaction with the pre-existing
"adjust inequities
5
"
law's ability to
visited upon plan participants.
4 5s. Bruce, "Pension Claims: Rights
and Obligations" (BNA, 1988).
° Id., Chapter 7, page 314, citing
to S. Rep. 93-127, at 5, 1 ERISA Leg.
Hist. 591 and H.R. Rep. 93-533 at 5, 2
ERISA Leg. Hist. 2352.
10
———e wT
a,
ON OS Oo Ow
ON ee le Nee AR ee ee Re 2 RR TR a ee he
ox
ee we AS 6 ed grt ee
atin astern ee tal
Continuing, the author notes that both
the Senate Committee on Labor and Public
Welfare and the House Education and Labor
Committee reports on ERISA observed that
"courts strictly interpret the plan
indenture and are reluctant to apply
concepts of equitable relief or to
disregard technical document wording."®
The Congressional leaders adopting
ERISA viewed pensions as a form of
deferred compensation to be safeguarded.
They viewed ERISA benefits as a matter of
contract right, and took steps to make
pension plans more viable contracts.’
That view is undermined by an "arbitrary
6 ta.
’ Id., at page 315-16, quoting from
legislative history.
11
and capricious" standard of review.®
ERISA's statement of Congressional
Findings and Declarations of Policy also
reflects an intent to improve the rights
of workers. For example, 29 U.S.C
1001(b) states that it is ERISA's
intended policy to protect "the interests
of participants in employee benefit plans
and their beneficiaries by ... [among
other things] establishing standards of
conduct, responsibility, and obligation
for fiduciaries of emplcyee benefit
plans, and by providing for appropriate
remedies, sanctions, and ready access to
8 td., at pages 314-15, referencing
remarks by Senators Harrison Williams and
Jacob Javits, two chief Senate leaders
and sponsors of ERISA, as well as
comments by Representative Carl Perkins,
who was the Chairman of the House
Education and Labor Committee when ERISA
was enacted.
12
the federal courts." (bracketed material
added. )
Congress reiterated its intent by
adopting the "prudent man" stendard of
care for ERISA fiduciaries, mandating
that they discharge their duties "solely
in the interest of the participants and
beneficiaries ..."? Congress also made
9 This "prudent man" standard is
found at 29 U.S.C. 1104 (a). In
pertinent part, it provides:
"(1) Subject to sections 1103(c) and
(ad), 1342, and 1344 of this title, a
fiduciary shall discharge his duties
with respect to a plan solely in the
interest of the participants and
beneficiaries and -
(A) for the exclusive purpose of:
(i) providing benefits to
participants and their benefi-
Ciaries; and
(ii) defraying reasonable
expenses of administering the
plan;
(B) with the care, skill,
prudence, and diligence under the
circumstances then prevailing that a
prudent man acting in a like capacity
and familiar with such matters would
13
clear that ERISA's provisions were to be
broadly construed, consistent with its
underlying purposes. Thus, Senate Report
Number 93-127 states: "It is intended
that coverage under the Act be construed
liberally to provide a maximum degree of
protection to working men and women
covered by private retirement programs."
Reprinted in [1974] 3 U.S. Code Cong. &
Admin. News, page 4854.
The courts have uniformly recognized
ERISA's remedial purposes, holding that
it is to be liberally construed so as to
safeguard the well being and security of
working men and women. 2°
use in the conduct of an enterprise
of a like character and with like
eims .. «®
105.g., Smith v. CMTA-IAM Pension
Trust, 746 F.2d 587, 589 (9th Cir. 1984),
ato v. West fe) . ne,, 73
14
‘ a oe OE oli Le Se ee a gk a
II. ERISA'S POLICY IS NOT FURTHER BY
A DEFERENTIAL STANDARD OF REVIEW.
CONGRESS NEVER INTENDED THAT SUCH
A STANDARD BE IMPORTED FROM THE
COMMON LAW OF TRUSTS. PRIOR
CASES ADOPTING SUCH A STANDARD
SHOULD BE REJECTED.
When a benefit plan administrator
interprets benefit plan provisions and
makes determinations on individual
—_
benefit claims, he is functioning as a
fiduciary.+} Although ERISA provides
fiduciaries with some discretionary
authority, Congress never intended to
insulate fiduciaries from accountability.
Congress would not have mandated a
strict, "prudent man" standard of care if
fiduciary decisions were to be so
F.2d 1402, 1409 (2d Cir. 1985), and
Rettig v. PBGC, 744 F.2d 133, 135 (D.C.
Cir. 1984).
11 39 U.S.C. 1102(a).
15
insulated./* ERISA's structure instead
demonstrates that fiduciaries are to be
fully accountable for their actions. It
provides a mechanism for remedying
fiduciary violations, by providing ready
access to the courts. ??
Congress
encouraged civil actions to remedy
fiduciary misconduct by authorizing
awards of attorney fees to claimants in
litigation. Congress also provided for
a very lengthy statute of limitations for
12 599 U.S.C. 1104(a).
1399y.S.C. 1132(a) (1) (B) authorizes
actions not only to recover benefits, but
also to enforce other rights and clarify
the right to future benefits. 29 U.S.C.
1132 (f) emphasizes the importance
attached by Congress to encouraging
actions to safeguard rights under ERISA:
it provides for jurisdiction in the
district courts "without respect to the
amount in controversy or the citizenship
of the parties..."
16
actions based upon a fiduciary's breach
of "any responsibility, duty, or
obligation." 29 U.S.C 1113(a). (emphasis
added. )
Despite this clear expression of
legislative intent, the courts have
nevertheless generally applied an
"arbitrary and capricious" standard of
review in examining the claims decisions
of ERISA fiduciaries. The Third Circuit
is to be commended for its exhaustive
examination of how the arbitrary and
capricious standard originated under the
LMRA and was thereafter extended to
employee benefit cases under ERISA. 4
The Third Circuit has correctly
observed significant differences between
14 See 828 F.2d at pages 138-45.
17
benefit plans arising under the LMRA and
ERISA. The LMRA sets out elaborate
requirements intended to protect the
benefit plans it authorizes from being
controlled by a party biased toward
either the employees or employer. In
contrast, ERISA has no such protections.
The briefs of Petitioners and their Amici
fail to fully address this aspect of the
Third Circuit's analysis. They instead
focus on the common law of trusts. They
contend that it mandates a deferential
standard and that Congress intended for
it to form the exclusive basis for the
review of a fiduciary's decisions.
Petitioner's argument is based upon an
incomplete examination of legislative
history, and also upon an incomplete
analysis of the common law of trusts.
18
ERISA's “prudent man" standard, and a "de
novo" standard of review, are in fact
consistent with the common law of
5
trusts.? In fact, Congress recognized
and intended that ERISA would involve
modifications and alterations of common
law trust concepts. The committee
reports observed that employee benefit
plans are very different from the
testamentary and inter vivos trusts upon
which trust law was founded. ?® Scholarly
1° See Donovan v. Mazzola, 716 F.2d
1226, 1231 (9th Cir. 1983), cert. denied
464 U.S. 1040 (3d Cir. 1984). This case
found the "prudent man" standard to be
mandated by ERISA's explicit language and
legislative history. It also found the
test to be consistent with the common law
of trusts, citing III Scott on Trusts
Section 187.2 at 1514 and n.2; Sections
227-227.3, at 1805-12.
16 pension Claims: Rights and
Obligations," supra, at page 317,
including footnote 84.
19
studies have concluded that "the
balancing of conflicting interests of
current and future claimants that
supported the arbitrary and capricious
standard under traditional trust law is
absent under ERISA. "7
ERISA, unlike the LMRA, has no equal
representation requirements to assure
that the plan fiduciaries are impartial.
In fact, the non-LMRA benefit plans are
typically controlled by the employer, and
not by a group evenly divided between
employer and employees. The employer
adopts the governing Plan document, and
selects and often supervises the Plan
fiduciaries. Employees have little or no
17 t4., at page 317-18, citing R.
Gilbert, "Fiduciary Duties Under ERISA,"
43 Inst. on Fed. Tax'n, at 33-6 (1985).
20
voice, and must typically rely upon the
good faith of the employer and plan
administrators. In this non-LMRA
context, there is a significant danger
that the plan fiduciaries will not be
impartial, particularly if the
fiduciary's decision has a direct or
indirect financial impact upon the
employer. ERISA's only real safeguard
against such bias is civil litigation by
aggrieved benefit plan claimants. A "de
novo" standard of review is therefore
essential if such actions are to
effectively police fiduciary conduct.
A “de novo" standard of review is
consistent with the Congressional
objective of fiduciary standards which
are "more exacting" than that found prior
21
to ERISA.?® aA "de novo" standard also
conforms to the Congressional committee
report statement that ERISA fiduciary
standards should be interpreted "bearing
in mind the special nature and purposes
of employee benefit plans intended to be
effectuated by the Act.t9
Petitioners and their Amici argue that
other mechanisms can insure that
fiduciaries comply with the minimum
requirements of ERISA. The experience of
PELA members is much to the contrary,
however. Defense interests enjoy many
1 Donovan v. Mazzola, supra, 716
F.2d at 1231.
19s. Rep. 93-127, at 29, 1 ERISA
Leg. Hist. 615; H.R. Rep. 93-533, at 29,
2 ERISA Leg. Hist. 2359; and Conf. Rep.,
at 302, 3 ERISA Leg. Hist. 4569. Each is
discussed at page 317 of "Pension Claims:
Rights and Obligations," supra.
22
advantages in ERISA litigation. Combined
with the arbitrary and capricious
standard, those advantages make ERISA
litigation a perilous undertaking for
benefit plan claimants. Unsophisticated
plaintiffs have their claims dismissed
for failure to first exhaust
administrative remedies;*? ERISA claims
generally are not subject to trial by
jury;7+ when a claims decision is shown
20 claimants must exhaust ERISA
administrative remedies as a prerequisite
to filing suit. E.g., ,
618 F.2d 559, 567-68 (9th Cir. 1980);
Denton v. First National Bank, 765 F.2d
1295, 1303 (5th Cir. 1985); Mason v.
Continental Group, Inc., 763 F2d 1219,
1227 (llth Cir. 1985).
21In re Vorpahl, 695 F.2d 318 (8th
Cir. 1982); Calamia v. Spivey, 632 F.2d
1235, 1237 (5th Cir. 1980); and dicta in
, 748 F.2d 1348,
Blau v. Del Monte Corp.
1357 (9th Cir. 1984), cert. denied, 449
U.S. 1112.
23
to violate ERISA, the remedy is typically
only a remand for further administrative
proceedings, rather than relief on the
merits;
extra-contractual damages are
generally not available to provide full
relief and to make contingency repres-
entation by counsel feasible;*? and
attorney fee awards have not filled in
22 Blau v. Del Monte Corp., supra,
748 F.2d at page 1353; W Vv -C.
Penney Co., 710 F.2d 388, 393 (7th Cir.
1983).
23 Mass. Mutual Life Ins. Co. v.
Russell, 473 U.S. 134, 105 S.Ct. 3085,
(1985) foreclosed the recovery of extra-
contractual damages under 29 U.S.C. 1109,
and Circuits have since held that such
damages are not available in other ERISA
actions. E.g., Sokol _v. Bernstein, 803
F.2d 532, 534-38 (9th Cir. 1986); Powell
v. C. & P. Tel. Co. of Virginia, 780 F.2d
419, 424 (4th Cir. 1985), cert. denied
476 U.S. 1170 (1986).
24
the resulting gap. 74
IIt. THE ARBITRARY AND CAPRICIOUS
STAN-DARD VIOLATES THE "PLAIN
MEANING" RULE OF STATUTORY
CONSTRUCTION. IT IS INCONSISTENT
WITH ERISA's OVERALL STRUCTURE
AND LEGISLATIVE HISTORY. THE
COURTS HAVE STRUG-GLED TO COPE
WITH IT. THE RESULT HAS BEEN A
COMPLICATED BODY OF CASE LAW,
WITH MANY EXCEPTIONS TO THE
DEFERENTIAL STANDARD. THE COURT
SHOULD RESTORE CERTAINTY AND
UNIFORMITY TO TEE LAW, BY ELIMI-
NATING THE ARBITRARY AND CAPRI-
CIOUS STANDARD.
24 Few attorneys can afford to
represent ERISA claimants based on hopes
of a discretionary fee award under 29
U.S.C. 1132(g). See "Pension Claims:
Rights and Obligations," supra, at 675-
77. The standards for awarding fees have
only recently been settled. E.g.,
Vv Ww Vv
Citizens! ’
U.S. , 106 S. Ct. 3088 (1986)
("Delaware Valley I") and Pennsylvania,
et al. v. Delaware Valley Citizens'
U.S.
, 107 S. Ct. 3078 (1987) ("Delaware
Valley II"). How the Circuits will apply
the standards to ERISA remains to be
seen.
25
This honorable Court has found that
ERISA seeks to comprehensively regulate
employee pension and welfare plans. 2°
When faced with issues of statutory
interpretation under’ ERISA, despite
ERISA's acknowledged statutory complex-
ity, 7° the Court has felt compelled "to
begin with the language employed by
Congress and the assumption that the
ordinary meaning of that language
accurately expresses the legislative
purpose." Ss. V-
25 pilot life Ins. Co. v. Dedeaux,
__u.S.._, 107 S.Ct. 1549 (1987); Shaw
463 U.S. 85, 103
v. Delta Airlines, Inc.,
S.Ct. 2890, 2896 (1983), and Metropolitan
Ss. V , 471 U.S. 724,
732, 105 S.Ct. 2380 (1985).
26rRISA is a "comprehensive and
reticulated statute."
Nachman Corp. Vv.
PBGC, 446 U.S. 359, 361, 100 S.Ct. 1723
(1980).
26
Massachusetts, supra, 471 U.S. at Page
740. In construing ERISA, the court has
also found it helpful to look to the
overall structure of the Act, and at
ERISA's legislative history. Finally,
the court has firmly rejected any "blue
pencil" method of statutory construction
under ERISA, and has instead insisted
that ERISA's provisions be interpreted in
"the relevant contexts in which statutory
language subsists." Mass. Mutual Life
ins. Co. v. Russell, 473 U.S. 134, 105
S.Ct. 3085 (1985). Other rules of
statutory construction applicable to
ERISA are summarized well in Amato v.
Western Union Intern., Inc., 773 F.2d
1402, 1408 (2d Cir. 1985). These guiding
principles of construction are all
relevant in considering the proper
27
standard of judicial review for benefit
Claim decisions by ERISA fiduciaries.
A deferential standard of judicial
review ignores the plain language of 29
U.S. 1104(a), and also violates the
Court's "blue pencil” prohibition. Such
a standard of review is also inconsistent
with the overall structure of the Act,
because it tends to defeat and render
superfluous the "six carefully-integrated
civil enforcement provisions found in
section 502(a) of the statute [29 U.S.C.
1132(a))] weoo™ ss u ,
Co. v. Russell, supra, 473 U.S. at page
146. The civil enforcement mechanisms
can do little to safeguard the rights of
employees when a deferential standard of
judicial review is employed.
Many courts have struggled with the
28
ween Gan eae te, tee — on
Re See ee
obvious inequities of the arbitrary and
capricious standard of review. Those
inequities were discussed as follows by
one district court judge, regarding the
Fifth Circuit's adoption of the defer-
ential standard in Bayles v. Central
States, Southeast, etc., 602 F.2d 97, 99
(Sth Cir. 1979):
"That holding perplexes this
court. It allows an employer to
breach his employee's compensation
contract with impunity, so long as
the employer does not do so in an
“arbitrary or capricious" manner.
The administrator may be stupid, or
simply ignorant, or ill-advised on
the meaning of the contract. No
matter. He may breach and breach
again, yet the employee cannot
enforce his rights.
With the social security
retirement system in a shambles and
its bankruptcy imminent, private
benefit plans offer most workers
their only hope of security in old
age or disability. To an older
worker, his pension rights may be
more valuable than his salary. He
can enforce those valued rights
however, if and only if he can prove
29
the contract's breach to be
‘arbitrary and capricious' ...The
court believes that disputes over
employment contracts - including
pension and disability benefit plans
- are most rationally, economically,
and equitably resolved by the
application of traditional contract
principles. It is, after all, a
contract the Court is being asked to
interpret. ..--Basic contract
concepts and terms do not, of
course, convey absolutely precise
meaning. But they carry
substantially more meaning than the
slippery concept of ‘arbitrary and
capricious’. Requiring that
'standard' of review makes for a
paucity of legal analysis. It
substitutes conclusory phrases for
specific supporting factual determi-
nations."
Imaginative counsel and courts have
developed "refinements" or "exceptions"
to the arbitrary and capricious standard,
27 Hayden v. Texas - U.S. Chemical
Co., 557 F. Supp. 382, 389-90 (E.D.Tex.
1983) on remand from, 681 F.2d 1053 (5th
Cir. 1982). This case is discussed at
pages 322-24 of "Pension Claims: Rights
and Obligations," supra.
30
nl Hae
anne se
in an attempt to avoid overly harsh
results. 28 Thus, decisions interpreting
benefit plan provisions have been held to
be “arbitrary and capricious" where they
depend upon a plan interpretation which
is inconsistent with the "plain meaning"
of the plan document. 29
Similarly, the courts have overturned
interpretations differing from a benefit
28upension Claims: Rights and
Obligations," supra, at pages 324-46,
beginning with a discussion of Dennard v.
, 681 F.2d 306 (5th
Cir. 1982).
29 Id., at pages 325-26, including
citations to Blau v. Del Monte Corp., 748
F.2d 1348 (9th Cir. 1984) gert. denied,
474 U.S. 865 (1985) and
Mullins, 643 F.2d 1320 (8th Cir. 1981).
31
plan's past practice or custom.°9 still
other courts have required strict proce-
dural compliance by plan fiduciaries as
a prerequisite to application of the
arbitrary and capricious standard. >}
Still other classes of ERISA cases appear
to have abandoned the arbitrary and
capricious standard of review altog-
32
ether. These cases specifically
39 74., at pages 328-30, including a
citation to Kann v. Keystone Resources,
Inc. Profit Sharing Plan, 575 F. Supp.
1084 (W.D.Pa. 1983).
31 Id., at pages 343-45, including
citations to Struble _v. New Jersey
ew mplo . W » vou
F.2d 325 (3d Cir. 1984), Blau, supra, and
Short v. Central States Pension Fund, 729
F.2d 567 (8th Cir. 1984).
32 ra., at pages 358-64. Cited case
examples include Central Hardward Co. v.
Central States Pension Fund, 770 F.2d 106
(8th Cir. 1985), cert. denied, 475 U.S.
1108 (1986) and Struble v. New Jersey
Brewery Employees Welfare Fund, supra.
32
: fa ee eee ee ee we ee, ee en aa
eer
involve issues of trustee authority,
interpretations of single-employer
collectively bargained plans, some
insurance contracts, and class interpre-
tations.
Despite these exceptions and
"refinements", the vast majority of
individual benefit claims under ERISA are
still subjected to a deferential standard
of review. Thus, the courts frequently
find themselves treating classes of ERISA
cases differently, despite the fact that
each such case is subject to the same
governing statute. The result is a
chaotic lack of uniformity and certainty
under the law. The situation therefore
merits this
court's supervisory
intervention.
33
IV. A DEFERENTIAL STANDARD FAILS TO
MEET THE REASONABLE EXPECTATIONS
OF EMPLOYEES. IT CREATES A DOUBLE
STANDARD THAT CONGRESS COULD NOT
HAVE ENVISIONED OR INTENDED.
BENEFIT PLAN PARTICIPANTS AND
BENEFICIARIES END UP WITH FEWER
RIGHTS AND PROTECTIONS THAN DO
INDIVIDUALS WHO HAVE SEPARATE-
LY CONTRACTED FOR PROTECTION
THROUGH POLICIES OF INSURANCE.
As was noted above, the drafters of
ERISA sought to treat employee benefits
as being a form of compensation. A
substantial percentage of ERISA welfare
benefit plans are at least partially
funded by direct contributions from
employees. Thus, the 1986 Johnson and
Hi ns Corpora
Survey ("Survey") shows that nationwide
over 40% of employers require employees
to contribute toward insurance premium
for health care benefits for themselves,
and approximately 70% require employees
34
to contribute toward premiums. for
dependant coverage. (Survey, Pages 26-
27). The Hewitt Associates Salaried
Employee Benefits Provided by Major U.S.
Employers in 1986 ("Study") shows that
nationwide 74% of large employers, a
group including 96% of the Fortune 100
industrials, require employee contri-
butions either for employee or dependant
medical care coverage. (Study, Page 27).
Moreover, the Hewitt Associates Salaried
Employee Benefits Provided by Major U.S.
Employers: A Comparison Study, 1981
through 1986 ("Comparison Study") shows
that nationwide during a recent five year
period, there was a marked trend for
ERISA health care plans toward requiring
employee contributions - an additional
10% of large employers have now imposed
35
such a requirement (Comparison Study,
Page 29).
The employees who participate in these
ERISA benefit plans view such partici-
pation as a substitute for private
insurance. They are making direct "out
of pocket" payments expecting to obtain
the same protection that one's private
insurance affords. By definition, such
participation gives rise to reasonable
expectations of security and protection
in an event of an incident giving rise to
a clain. The analysis above, however,
demonstrates that the arbitrary and
capricious standard of review can lead to
results which do not meet the individual
employee's reasonable expectations.
In contrast, the individual who
privately contracts for his own health,
36
disability, or annuity insurance receives
far better treatment from the courts in
the event of litigation over a disputed
clain. Such disputes fall outside the
scope of ERISA, and are subjected to a
"preponderance of the evidence" test.°?
The courts apply principles of contract
analysis to such disputes.
Surprisingly, there has been little
discussion of this "double standard" in
the law's treatment of its citizenry in
reported ERISA decisions. It seems
highly unlikely that Congress could have
intended such a result, in view of the
clear statements that ERISA was intended
33 See Couch on Insurance 2d (Rev.
Ed.) Section 79:314-19, cited on Page 365
of "Pension Claims Rights and
Obligations", supra.
37
to provide employees with increased
security and protection.
Ultimately, this "double standard"
will operate to discourage individual
participation in ERISA group benefit
plans, contrary to the intent of
Congress. Unfortunately, the average
worker often does not’ realize or
appreciate the impact of this "double
standard" until after the incident giving
rise to his/her claim occurs. It is then
too late for the employee to make
alternate arrangements for security and
protection. A decision to abandon the
arbitrary and capricious standard of
review would help to eliminate the
"double standard" and place all citizens
with benefit claims on equal footing in
the eyes of the law.
38
CONCLUSION
The arbitrary and capricious standard
is an anomaly which runs counter to the
clear purpose and intentions of Congress
in enacting ERISA. In operation, it is
inherently unjust. A "de novo" standard
of review is more appropriate, and was
properly applied in the proceedings
below. The decision of the Third Circuit
should therefore be upheld.
Respectfully submitted,
PAUL H. TOBIAS* JAMES J. GUZIAK**
TOBIAS AND KRAUS of JAMES J.GUZIAK,
911 Merchantile A Prof. Corp.
Library Building 2700 N. Main St.
414 Walnut Street Suite 535
Cincinnati, OH Santa Ana, CA
45202 92701
(513) 241-8137 (714) 547-5858
*Counsel of Record **Of Counsel
Dated: August, 1988
39
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