The Sixth Circuit Court of Appeals, in Clemons v. Norton Healthcare Retirement Plan, held that certain doctrines of contract interpretation did not apply to resolve ambiguities in an ERISA plan once a court has determined that the plan document grants the administrator broad discretion to interpret its terms.
Law. In Firestone Tire and Rubber v. Bruch, the Supreme Court held that when an ERISA plan contains language granting the administrator discretion to construe the terms of the plan, a reviewing court should defer to any interpretation adopted by the administrator that is not arbitrary and capricious. In response to Firestone, many plan sponsors have now incorporated language into their ERISA plan documents that explicitly grant the plan administrator authority to interpret the plan’s provisions.
Facts. In Clemons, a group of early retirees under the defendant’s employee benefit plan disagreed with the plan administrator’s calculation of benefits and filed a class-action lawsuit seeking to have their benefits recalculated under their alternative interpretation of the plan document. The plan document contained Firestone language granting the plan administrator discretion to interpret the terms of the plan.
District Court. The district court agreed with the plaintiffs and ordered the defendants to recalculate the benefits. Specifically, the district court held that the plan provision at issue was sufficiently free from ambiguity such that it rendered the plan administrator’s interpretation arbitrary and capricious under the Firestone standard.
The court also held that common law doctrine of contra proferentum (i.e., a doctrine of contractual interpretation providing that where a term is ambiguous, the preferred meaning should be one that works against the interest of the drafting party) also applied in the instant case, thereby allowing the retirees’ alternative interpretation.
In turn, the defendant appealed the district court’s adverse determination to the Sixth Circuit.
Sixth Circuit. After reviewing the matter, the Sixth Circuit reversed the lower court’s decision, holding that that the plan’s Firestone language overrode (and was “inherently incompatible” with) the doctrine of contra proferentum. In particular, the Sixth Circuit rejected the district court’s notion of relying on the doctrine of contra proferentum to mitigate Firestone deference. The Sixth Circuit noted that once a reviewing court determines that a plan contains Firestone language, it should defer to the plan administrator’s interpretation of the plan so long as it is not arbitrary and capricious.
Employer Takeaway. Clemons is a reminder that it is to the plan sponsor’s advantage to include Firestone language in their plan documents because doing so will help prevent ambiguous plan terms from being construed against them