BASIC GUIDELINES FOR ERISA LITIGATION

Margie R. Lariviere, Esq.

Partner

Protected by the Attorney

ERISA disability litigation is on the rise. Insureds are more aggressive in pursuing their rights, both in appealing adverse claim decisions and in suing insurance companies if a denial is upheld on appeal. The internet seems to be fueling this trend, as hundreds of websites are devoted to attacking insurers and giving advice (good and bad) for pursuing claims.

The increase in lawsuits being filed results in larger numbers of cases being managed by in-house litigation staff. The intent of these guidelines is to provide a basic checklist for discussing strategy with outside counsel and ensuring that cases are being handled effectively and efficiently. The guidelines may be used for oversight of cases throughout the United States but the terminology describing court procedure, as well as citation to cases, is mostly derived from federal practice in California and the Ninth Circuit.

1. REMOVE ERISA ACTIONS TO FEDERAL COURT

a. Federal courts are the preferred forum

ERISA lawsuits are often filed in a state court. This is a strategic maneuver on the part of plaintiffs’ counsel who believe that state court judges are less familiar with ERISA law, more prone to allow discovery, and more inclined to award higher attorneys’ fees if plaintiff prevails in the action.

Most defense counsel agree that federal court is the preferred forum for ERISA litigation. ERISA actions are governed by federal statutes and case law. Federal judges preside over a larger number of ERISA cases and have a much greater familiarity with ERISA law. Therefore federal judges are more inclined to set an agenda for resolution of the key issues, including the standard of review discussed below. Moreover, a federal judge tends to be assigned to the matter from the outset and becomes familiar with the facts and issues of a particular case. This results in more efficient litigation, with decisions rendered in a timely manner, and with more predictable results. [Caveat: there is always the chance of getting assigned to a judge who is lazy, sloppy, disfavors insurance companies and delays on all motions. But these judges are the exception rather than the rule.]

If you receive a lawsuit filed in state court, strongly consider removal to state court.

b. Be on the ball – removal must take place within 30 days of formal service

Lawsuits filed in state court must be removed within 30 days of formal service. (28 U.S.C. § 1446(b).) Given the narrow window of time for removal, you should promptly retain outside counsel to handle the action. This is especially important if more than one defendant is named and served with a copy of the complaint. A majority of courts require that the removal be filed within 30 days of service upon the defendant who first received service. In ERISA actions, plaintiffs often name both the plan itself and the insurance company. Service upon the plan before the company may shorten the time for the company to remove. Therefore it is important for counsel to check the status of service on all parties and remove within 30 days of the first served defendant. Moreover, if more than one defendant has been served, then the party removing the action must obtain the consent of all parties to the removal and specifically allege the consent in the removal papers. A separate joinder in the removal must be filed by these other defendants within 30 days of removal.

Note, there is no absolute right to proceed in federal court even though ERISA is governed by federal law. If any defendant refuses to consent to removal, then the case will remain in state court.

2. SEEK DISMISSAL OF ANY COMMON LAW CAUSES OF ACTION

An insured suing under a plan governed by ERISA has limited remedies. The insured can seek recovery of benefits past due and can ask for attorneys’ fees. But that’s all – an insured is not entitled to seek any tort damages. This limitation in potential damages is a real thorn in the side of the plaintiff’s bar. In an attempt to circumvent ERISA’s recovery options, many attorneys are now filing lawsuits that allege common law causes of action - such as bad faith or intentional infliction of emotional distress - in an effort to recover tort damages. This tactic should be aggressively challenged at the outset.

First, counsel should ask plaintiff to stipulate to dismiss the common law causes of action. If plaintiff’s counsel is unfamiliar with ERISA law, simply providing the legal support for dismissal may be enough to obtain this stipulation.

Second, consider filing a motion to dismiss for failure to state a claim for which relief may be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”). The motion is based on grounds that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. . . .” 29 U.S.C. § 1144(a). There is ample case law to support preemption of tort causes of action. Generally, the motion will be heard within 35 days of its filing with a high likelihood that the court will dismiss the tort actions.

Once the tort causes of action are dismissed, counsel should file an answer to the remaining ERISA causes of action.

3. USE THE INITIAL DISCLOSURE TO EMPHASIZE THAT EVIDENCE SHOULD BE LIMITED TO THE ADMINISTRATIVE RECORD

All parties are required to exchange initial disclosures once the case is at issue. (FRCP 26(a).) The court usually sets a deadline for the exchange that is set forth in a scheduling order issued at the time the lawsuit is filed or removed to federal court. The initial disclosure presents an early opportunity to emphasize the narrow reach of discovery in ERISA actions.

Among other items, Rule 26(a) requires that the parties disclose witnesses whom the party may use to support its position and to produce documents that it intends to use to support its defense of the action. In an ERISA action, the documents to be produced consist of the plan documents, the policy and the administrative record. Counsel should name the company witness who will authenticate the record and note that the company employees who were involved with the claim decision are listed in the record. Counsel should use the initial disclosure to emphasize that the action is governed by ERISA and that the issues can be decided solely by reference to the administrative record.

4. SHAPE THE LITIGATION THROUGH USE OF THE JOINT CASE MANAGEMENT CONFERENCE STATEMENT AND SUBSEQUENT CASE MANAGEMENT CONFERENCE

The court’s scheduling order usually will set deadlines for the parties to do the following: (1) meet and confer on discovery, settlement and other issues; (2) file a joint case management conference statement; and (3) attend a case management conference (“CMC”) at an early stage of the litigation. In some districts, this conference may be referred to as a status or scheduling conference.

The meet and confer requirement presents an excellent opportunity for counsel to narrow the issues and shape the case for ongoing litigation. In many instances plaintiff’s counsel is unfamiliar with ERISA and wants to treat the lawsuit as a typical action, seeking discovery, asking for a jury trial, and intending to present evidence outside of the administrative record at both the motion and trial stages. It is defense counsel’s task to educate plaintiff’s counsel about the limitations inherent in ERISA actions, to clearly outline these limitations in the joint statement filed with the court, and to ask the court to issue a scheduling order that is specific to ERISA actions. Educating opposing counsel, and any judge unfamiliar with ERISA, about the special litigation requirements of ERISA actions will save all parties time, effort and cost.

The key issues to address in the joint statement and subsequent CMC are as follows:

* the standard of review that the court should apply to review the company’s claim decision;
* the limits on discovery;
* a timetable for the applicable motions;
* highlight that ERISA actions are appropriately heard by motion for summary judgment given the special rules governing ERISA and the fact that plaintiffs are not entitled to a jury trial

Of course, there are some differences between the federal circuits on certain of these issues. For example, the majority rule in the circuit courts is that a plaintiff is not entitled to a jury trial in ERISA cases. However, there are scattered numbers of district court decisions that have allowed a plaintiff to proceed with a jury trial in some ERISA actions. (E.g., Reeves v. Continental Equities Corp. of America, 767 F. Supp. 808 (S.D. N.Y. 1991); Ganitano v. NN Investors Life Ins. Co., Inc., 733 F. Supp. 342 (S.D. Fla. 1990).) The point is to raise the limitations inherent in ERISA actions at an early opportunity and to have the court issue a ruling narrowing the discovery and the issues where applicable.

5. OBTAIN EITHER A STIPULATION OR COURT ORDER ON THE STANDARD OF REVIEW

In evaluating the company’s claim decision, a court will apply either of two standards of review: (1) “arbitrary and capricious” (also called abuse of discretion); or (2) de novo. As discussed below, the arbitrary and capricious standard is much more favorable to the company. Accordingly, counsel should pursue the standard of review issue from the outset.

In order to have the arbitrary and capricious standard apply, the plan must contain language that vests discretion with the company to make a claim decision. The following is typical vesting language found in recent plan documents:

The policy is delivered and is governed by the laws of the governing jurisdiction and, to the extent applicable, by the Employee Retirement Income Security Act of 1974 (ERISA) and any amendments. When making a benefit determination under the policy, [the carrier] has discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy.

There may be several versions of the policy/plan documents. The Ninth Circuit rule is that the court will look to the text of the ERISA documents in effect at the time of the denial of benefits to determine the standard of review. Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d 1154, 1160-61 (9th Cir. 2001) (“[A]n ERISA cause of action based on a denial of benefits accrues at the time the benefits are denied.”)

a. Ask plaintiff to stipulate to the vesting language and ask the court to issue an order at the CMC

Discretionary language in the policy should be pointed out to plaintiff’s counsel at the meet and confer session. Educate counsel about the federal case law’s treatment of the language. For example, in the seminal case of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 103 L.Ed.2d 80, 109 S.Ct. 948 (1989), the United States Supreme Court held that when an ERISA plan vests the claim administrator with discretionary authority, the court will review the administrator’s decision under a deferential “arbitrary and capricious” or “abuse of discretion” standard.

Counsel should encourage plaintiff to stipulate to the abuse of discretion standard of review. If so agreed, counsel should file the stipulation with the court and/or include the stipulation in the joint case management conference statement and ask the court to issue an order setting forth the applicable standard.

A plaintiff’s counsel may refuse to stipulate because of unfamiliarity with ERISA, concern about agreeing to a tactic that may come back to haunt him/her, potential malpractice, or because his or her client has declined to stipulate. If plaintiff refuses to stipulate but does not raise any reason for the refusal - such as a potential conflict, discussed below - then counsel should raise the issue in the joint statement. Specifically, counsel should quote the plan language and reference decisions that favor an abuse of discretion standard. If plaintiff’s counsel has not raised any issues to counter the court’s application of the abuse of discretion standard, then counsel should ask the court to rule on the issue in its CMC order based on the legal precedent cited in the joint statement.

The court is unlikely to rule on the standard of review issue at the CMC if plaintiff raises the issue of potential conflict.

b. If not resolved at the CMC, file a motion on the standard of review

Plaintiffs often challenge the deferential standard of review because they prefer to have the court look at the claim decision de novo, i.e., without giving deference to the claim administrator.

If plaintiff challenges the standard of review – despite clear vesting language in the plan documents – counsel should ask the court to set a briefing schedule to hear a motion on the standard of review. Once the standard of review issue is resolved, the parties should be able to resolve the matter by cross-motions for summary judgment. Alternatively, a motion can be brought to address both the standard of review and the ultimate claim decision.

A plaintiff’s challenges to the standard of review are often made on conflict of interest grounds that arise out of one or all of the following grounds: (1) the dual relationship as claim administrator and payor of the claim; (2) violation of ERISA regulations; and (3) improper medical review. An example of each challenge is given below.

(1) Dual relationship as claim administrator and payor of the claim

A plaintiff often contends that the carrier is not entitled to invoke the deferential abuse of discretion standard of review because the carrier who both pays the claim and renders a claim decision is a conflicted fiduciary operating out of self-interest. Support for this position is derived from the Firestone case, in which the U.S. Supreme Court noted, “[I]f a benefit plan gives discretion to an administrator or fiduciary who is operating under a conflict of interest, that conflict must be weighed as a ‘facto[r] in determining whether there is an abuse of discretion.’” Firestone Tire Rubber Co. v. Bruch, 489 U.S. at 115 (citation omitted).

The Ninth Circuit has held that this dual role of payor and claim administrator is not alone enough to trigger a less deferential standard of review. See Atwood v. Newmont Gold Co., Inc., 45 F.3d 1317, 1323 (9th Cir. 1995). The Atwood court required that the plaintiff come forward with “material, probative evidence, beyond the mere fact of the apparent conflict, tending to show that the fiduciary's self-interest caused a breach of the administrator's fiduciary obligations to the beneficiary.” Absent such evidence proffered by the plaintiff, the court noted it would apply the traditional abuse of discretion review. In order to prevent the plaintiff from embarking on a fishing expedition in search of a conflict in each case, counsel should stress that the plaintiff’s burden is to come forward with evidence of a conflict in the administrative record itself before any discovery may be allowed. Newman v. Standard Ins. Co., 997 F.Supp. 1276, 1280-1281 (C.D. Ca. 1998).

When a plaintiff raises the conflict of interest issue, many courts will allow limited discovery for the plaintiff to determine if a conflict existed at the time the claim decision was rendered. At the CMC, counsel should ask the court to set specific and narrow guidelines to limit the discovery solely to the conflict issue.

(2) Violation of ERISA regulations

A second ground for challenging an arbitrary and capricious standard is based on a company’s failure to follow the notice requirements set forth in ERISA regulations. For example, in the Ninth Circuit case of Jebian v. Hewlett-Packard Co., 349 F.3d 1098 (9th Cir. 2003), the court held that a more stringent standard of review should apply when notice time lines were not met. The court held that the court should review the claim de novo, notwithstanding discretionary language in the policy, because there was no proper exercise of discretion to which to defer. The best way to counter such an argument is to ensure that the company meets the regulatory time limits for claim notices and decisions. If the company is unable to meet the deadlines imposed by the regulations, there are provisions for seeking extensions that should be rigorously followed.

(3) Improper medical review

A third basis for challenged a deferential standard is based on an administrator’s failure to obtain the appropriate medical review. Under such a scenario, a plaintiff will argue that the company forfeited its right to have its claim decision reviewed for abuse of discretion by virtue of its having “failed” to have a medical specialist review the claim. For example, in the Eighth Circuit case of Woo v. Deluxe Corp., 144 F.3d 1157, 1162 (8th Cir. 1998), the court applied a less deferential standard when “the plan administrator did not obtain the opinion of a specialist when confronted with an uncommon disease and only used the opinion of an in-house consultant to contradict the entire record.” A counter to this argument is that the medical diagnosis was not challenged, simply the limit of claimed restrictions. This is very fact dependent on the circumstances of each claim.

6. FILE A MOTION FOR SUMMARY JUDGMENT ON THE CLAIM DECISION

Once the court decides the standard of review issue, the case is postured for resolution by motion for summary judgment to resolve the issues short of trial.

a. Motion applying abuse of discretion standard

First, counsel should point out to the court that the usual tests for summary judgment motions do not apply in ERISA actions. In other words, the court is not to determine whether a genuine issue of fact exists, the usual test under FRCP 56. Instead, the court is asked to determine the legal issue of whether or not the insurance company abused its discretion in rendering a claim decision. See e.g., Bendixen v. Standard Ins. Co., 185 F.3d 939, 942 (9th Cir. 1999) (“the usual tests for summary judgment, such as whether a genuine dispute of material fact exists, do not apply.”).

In deciding whether a plan administrator abused its discretion, the court will usually evaluate whether the administrator: (1) rendered a decision without any explanation; (2) construed a provision of the plan in a way that conflicts with the plain language of the plan; or (3) relied on clearly erroneous findings of fact in making benefit determinations. Bendixen, supra, 185 F.3d at 944. If the administrator’s decision is “‘based upon a reasonable interpretation of the plan’s terms and was made in good faith,’” the court will uphold it. Id., quoting Estate of Shockley v. Alyeska Pipeline Serv. Co., 130 F.3d 403, 405 (9th Cir. 1997).

The abuse of discretion standard is considered to be more favorable to the insurance company than to the plaintiff, and the courts are inclined to grant summary judgment where some substantial evidence supports a claim decision, whether or not the claim decision was right or wrong. In contrast, the de novo standard is considered more favorable to the plaintiff because the court must consider the correctness of the decision and not merely its reasonableness. Nonetheless, a motion is still an appropriate method to have the issues ultimately resolved.

b. De novo standard

If the plan documents do not contain vesting language or if a court determines that the abuse of discretion standard should not apply, then the court will apply a de novo standard of review to the company’s claim decision. “When applying a de novo standard of review in the ERISA context, the role of the Court reviewing a denial of benefits is to determine whether the administrator . . . made a correct decision.” Hoover v. Provident Life & Accident Ins. Co., 290 F. 3d 801 (6th Cir. 2002).

When the district court applies a de novo standard of review to denial of a benefits claim, it may consider the claim on the merits. Parra v. Cigna Group Ins., 258 F. Supp. 2d 1058, 1064 (N.D. Cal. 2003). In the summary judgment context, if the court has sufficient evidence to enable a full exercise of informed and independent judgment, and finds that there is no genuine issue of material fact, then it may grant summary judgment. Id.

7. SEEK TO LIMIT DISCOVERY

Counsel should ask the court to set discovery limits at the CMC. However, this matter may be outstanding until the standard of review issue is determined.

Once the court has determined that an abuse of discretion standard applies, there should be no further discovery allowed in the action. Under ERISA case law, “the record that was before the administrator furnishes the primary basis for review.” Kearney v. Standard Ins. Co., 175 F.3d 1084, 1090 (9th Cir. 1999).

In general, discovery is equally limited in cases where the court will apply a de novo review. However, a district court has the discretion to consider evidence outside of the record when conducting a de novo review of a benefits decision. Friedrich v. Intel Corporation, 181 F.3d 1105,1111 (9th Cir. 1999); Mongeluzo v. Baxter Travenol Long Term Disability Benefit Plan, 46 F.3d 938, 944 (9th Cir. 1995). That discretion comes in at the summary judgment or trial stage.

The basis for granting a district court discretion in permitting evidence outside of the record is so that the court may come to a fully informed and independent judgment regarding the question whether a plaintiff is entitled to benefits. Mongeluzo at 944. One area in which district courts have been inclined to allow evidence outside of the record is for “claims that require consideration of complex medical questions or issues regarding the credibility of medical experts;” Waggener v. Unum Life Ins. Co., 238 F.Supp.2d 1179, 1183 (S.D. Cal. 2002), citing Quesinberry v. Life Ins. Co. of North America, 987 F.2d 1017, 1026-1027 (4th Cir. 1993).

In most cases, counsel should urge the court to limit the discovery to the administrative record.

8. UTILIZE THE COURT’S ALTERNATIVE DISPUTE RESOLUTION PROCEDURE

Federal courts are big advocates of resolution of cases through alternative dispute resolution (“ADR”). The three primary ADR alternatives in the Ninth Circuit are early neutral evaluation, mediation and arbitration. Most courts have set up an ADR unit that provides training to practitioners who are interested in conducting an ADR session. If the parties opt to use the court’s program, the ADR unit assigns the case to a panelist. The panelist volunteers his/her first four hours of time devoted to the session, and then charges at a maximum rate set by the court ($200 per hour in the Northern District of California).

If the case file is problematic, or if settlement may occur for less than the cost of filing a motion for summary judgment, then counsel should pursue ADR at the early stage of the litigation. By utilizing a court-sponsored program, the parties can take advantage of a reasonably priced session in an attempt resolve the issues and save on litigation costs and fees.

9. SET GUIDELINES FOR TRIAL

Few ERISA cases go to trial. However, if the case is not resolved by motion or settlement, counsel should ensure that the court is made aware of the evidentiary limitations inherent in an ERISA action. At the pre-trial conference, counsel should ask the court to set guidelines for presentation of witnesses and evidence. Counsel should ask the court to limit the documentary evidence to the administrative record and ask for limits on the number of witnesses and the scope of witness testimony.

It is fairly standard in most jurisdictions for ERISA trials to be scheduled for completion in one day. In general, the court asks for trial briefs, opening statements and submission of the administrative record. Often, declarations to authenticate the administrative record are used in lieu of a live witness.

ERISA section 502(g)(1) provides that the court in its discretion may award reasonable attorney’s fees and costs to either party in a benefits claim action. Most courts have adopted a five-factor test to determine whether a party is entitled to attorneys fees: (1) the degree of the opposing parties' culpability or bad faith; (2) the ability of the opposing parties to satisfy an award of fees; (3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances; (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties' positions. Hummell v. S.E. Rykoff & Co., 634 F.2d 446, 453 (9th Cir. 1980).

In practice, courts are quite willing to award fees to a prevailing plaintiff’s counsel and resistant to awarding fees to defendants who prevail unless plaintiff filed the suit in bad faith.