When Will a Plan Administrator's Denial of Benefits be an Abuse of Discretion - In Discrete Circumstances Says the Ninth Circuit
Almost every ERISA employee benefit plan contains so-called "Firestone language," which grants discretionary authority to determine eligibility for benefits and construe the terms of a plan. If a plan contains such language, then a plan administrator's interpretation of the plan terms is reviewed under an abuse of discretion standard, which, as discussed below, is a standard that participants typically have difficulty satisfying.
To mitigate the effect of the abuse of discretion standard, plan participant claims frequently address conflicts of interest, procedural irregularities, or a substantive lack of a reasonable basis and/or rational justification on behalf of the plan administrator in denying benefits. Recently, the Ninth Circuit Court of Appeals, in O' Rourke v. Northern California Electrical Workers Pension Plan, addressed a plan participant's claims of procedural irregularities and illustrated the difficulty that a plan participant may have in challenging an adverse denial of benefits decision. This decision is important in demonstrating how slight differences in the facts and circumstances of a participant's denial of benefits claim can result in potential liability and costly litigation for plan administrators.
The Ninth Circuit began its analysis in explaining that the only circumstance in which procedural irregularity can change the Court's review of a denial of benefits claim under the abuse of discretion standard is a situation in which the procedural irregularities are so substantial that an administrator engages in "wholesale and flagrant violations of the procedural requirements of ERISA, and thus acts in utter disregard of the underlying purpose of the plan as well." Such substantial procedural irregularities might be very unlikely to occur, and, in this case, the participant did not allege any irregularities which rose to that level. The Court therefore evaluated the participant's claim under the abuse of discretion standard.
In assessing the participant's claims, the Ninth Circuit reasoned that the level of conflict of interest and any allegations of bad faith are matters to be weighed in determining whether an administrator's decision was an abuse of discretion. At one end of the spectrum, the Court explained that if an administrator can show that it engaged in an "ongoing, good faith exchange of information between the administrator and the claimant, the court should give the administrator's decision broad deference notwithstanding a minor irregularity." However, if a more serious procedural irregularity has occurred - which the Ninth Circuit did not define or explain in detail - a court may weigh the potential for procedural irregularities more heavily. The Ninth Circuit acknowledged the abuse of discretion review is inherently "indefinite" and requires a case by case analysis.
In this case, the claimant, O'Rourke, alleged that four events could show procedural irregularities in denying his claim for benefits, all of which the Court rejected, but these were all highly factual specific inquiries, and any slight variation in facts could have produced a different result for him.
First, the claimant alleged that certain trustees harbored a personal hostility towards him, an allegation that, on its face, is one that is difficult to establish. The documents that plaintiff relied upon indicated that the trustees strongly disagreed with him, but according to the Ninth Circuit, that was insufficient to establish personal animus, as was a statement that plaintiff should have known that the Board would disagree with his position.
Second, the claimant argued that the plan had unreasonably changed its rationale and interpretation of plan provisions in denying him early retirement benefits. But the court concluded that even though the justifications for denying him benefits were different, they were not inconsistent with each other. Third, he argued that the trustees disregarded the advice of counsel. In response, while the Ninth Circuit acknowledged that, in a different case, disregarding the advice of counsel might weigh in favor of holding that an abuse of discretion occurred, in this case, this allegation only had a slight effect, if any, because the original opinion of counsel had not taken into account prior Board of Trustee interpretations of the same provision. Finally, the Ninth Circuit reasoned that the fact that the plan's Board of Trustees had considered amending the plan in 2010 in a manner that would have supported plaintiff's position, but did not do so, only established that the Board of Trustees had changed its mind - nothing more.
The Ninth Circuit also noted that the Board had kept O'Rourke informed at all stages of the decision making process and that none of the alleged irregularities prevented the administrative record from being fully developed or prevented the Board or a court from knowing all of the relevant facts. Thus, the Court reasoned that, at best, O'Rourke's procedural irregularity argument established that the current Board had a different interpretation of the plan than O'Rourke and past Boards, and it was unwilling to change that interpretation based upon counsel's advice or O'Rourke's arguments. The Ninth Circuit emphasized that while the Board's actions might not reflect "the platonic ideal of an open-minded plan administrator," it did not reveal any serious procedural irregularities that would weigh heavily against the Board..
Setting aside the procedural review, the Ninth Circuit turned to the substantive issue before them: whether the claimant could demonstrate it was an abuse of discretion to deny him plan benefits on the basis of engaging in what the plan defined as "prohibited employment." The claimant, a member of a multiemployer pension plan for electricians, contested a broad provision of the plan that defined "Prohibited Employment" as "the performance of services in any capacity in the Electrical Industry." He claimed his work as business manager of his local union, the International Brotherhood of Electrical Workers (IBEW) Local 6 should not have been prohibited under the plan because he was performing administrative work as a plan trustee on the Board of the IBEW -- not the traditional work of an electrician.
To decide whether the claimant's work for IBEW was covered under the "performance of services in any capacity in the Electrical Industry" under the terms of the prohibited employment provision, the Ninth Circuit followed the test set forth in Tapley v. Locals 302 & 612 of Int'l Union of Operating Eng'rs-Emp'rs Const. Indus. Ret. Plan, 728 F.3d 1134, 1139 (9th Cir. 2013)). This is the current test that courts in the Ninth Circuit utilize to determine if a plan's denial of benefits amounts to an abuse of discretion. Tapley set a standard of significant deference to the board in a denial of benefits case and provided for a "reasonable basis" and "rational justification" standard. Specifically, the Tapley court explained that (i) "We will accept the Board's interpretation unless it is "not grounded on any reasonable basis" and (ii) "The [Board's] interpretation need not be the one this court would have reached, but only an interpretation which has rational justifications."
Although the Tapley court put forth a standard of substantial deference to plan administrators it also recognized three ways in which a plan administrator's interpretation might not have a "reasonable basis" or "rational justification." First, if the administrator's denial of benefits clearly conflicts with the plain language of the plan. Second, if the administrator's interpretation "renders nugatory other provisions of the plan." Third, if the plan administrator's interpretation "lacks any rational nexus to the primary purpose of the Plan." The Ninth Circuit coined all three of these events as "Tapley errors" and applied them to the facts of the O'Rourke case. While Tapley is particular to the Ninth Circuit, other courts employ a similar substantive test to analyze a denial of benefits claim.
The Court in applying the Tapley errors, analyzed whether the administrator's denial of benefits conflicted with the plain language of the plan. Although it acknowledged that O'Rourke made "a strong argument" for why the best interpretation of "trade" in the plan is working as an electrician, the Court surmised that O'Rourke failed to exclude the Board's interpretation as a reasonable possibility. Next, the Court rejected that the prohibited employment provision rendered other plan provisions nugatory. The Court specifically concluded that the Board's definition of "industry" did not render nugatory "trade" in another operative section of the plan. Finally, the Ninth Circuit concluded that the administrator's denial of benefits for engaging in "prohibited employment" did not lack a rational nexus to the plan's purpose because the denial letters sent to O'Rourke stated that the plan should "avoid providing an incentive for experienced electricians to leave fieldwork for an administrative position in the industry and the substantial benefit costs that would go with it" and this broad interpretation of prohibited employment could help preserve plan assets.
The O'Rourke case illustrates an example of a denial of benefits based on a plan provision that both parties agreed to be ambiguous. Both sides agreed the "prohibited employment" provision was overly broad. This is hardly an ideal scenario because a different court on a different day could have applied Tapley differently or a plaintiff could have alleged the procedural irregularities cited by the court. The Court emphasized in its decision how these cases are highly factual and are based on the discrete circumstances of the denial of benefits and allegations of the claimant.
Therefore, to avoid the expenses of litigating participant claims over denied benefits, plan administrators should closely examine their plan provisions that may serve as a basis for denying benefits to participants and ensure they are clear and not open to differing interpretations. While the O'Rourke case was a win for the plan, when plan provisions are ambiguous it leaves the door open to differing interpretations of those provisions - potentially an adverse interpretation to the plan from the Court. This point only magnifies the fact that plan administrators should tread carefully in dealing with denial of benefit claims and carefully study their plan documents to ensure provisions that could result in a denial of benefits have the specificity sufficient to best avoid costly litigation. This is especially the case with a potential looming recession as these type of cases only have the potential to grow in number.
For more information, on how to take appropriate measures to protect against participant denial of benefit claims, plan sponsors should consult their ERISA counsel.
By Barry Salkin and Jordan Mamorsky