United States: 356 ABC's Of ERISA - An Alabama Perspective

"ERISA," the acronym for Employee Retirement Income Security Act of 1974, strikes fear in the hearts and minds of many lawyers. Perceived as complex and hypertechnical, ERISA is actually based on the common law of trusts, although many of its rules differ from their common law counterparts. ERISA, when broken down to its essentials, is much less difficult to understand than most statutory schemes.

ERISA is federal law governing employee benefit plans and persons who manage them. ERISA affects many areas of substantive law. Employment law specialists face ERISA issues when reviewing severance pay problems, claims of wrongful terminations and issues regarding health and pension benefits. Securities lawyers face ERISA issues when they work on the investments of employee benefit plans. In any sizable business transaction, corporate lawyers focus on company liabilities for retiree medical, pension and other obligations under ERISA.

In litigation, ERISA issues should be spotted before the initial pleading is filed. Otherwise, time and fees are wasted, and bad things can happen: for example, a lawsuit may be filed in the wrong court; federal court removal issues may be missed; a client may be deprived of a jury trial; and the wrong claims or defenses may be pleaded.

An "employee benefit plan" must be involved for ERISA to be a factor. Employee benefit plans may be pension plans or welfare plans. Generally, a pension plan provides retirement income to employees or "results in deferral of income" by employees until termination from employment or later. ¹ Thus, pension and retirement funds in many types of different compensation arrangements or profit sharing situations may be "pension plans" under ERISA. A welfare benefit plan provides, among other things, medical, surgical or hospital care benefits or benefits in the event of sickness, accident, disability, death, or unemployment.

2 Health insurance and disability plans, and other programs designed to supplement an employee's income, in the event of sickness *357 or injury, all may be "welfare plans" under ERISA. Severance plans, prepaid legal service plans, apprenticeship or other training programs may also be welfare benefit plans. ³

Initially, a lawyer should determine whether an ERISA plan is involved. In an employment law dispute, ask about medical insurance, disability compensation, employer stock option plans and severance payment plans and find out whether the employee was close to vesting in any plan or benefit. In a security suit, see whether any "plan assets" were involved and who had "authority or control" over them. A person with authority or control over plan assets generally is regarded as a "fiduciary," and, therefore, subject to special ERISA duties. In any dispute over a commercial transaction with an employee benefit plan, identify all the parties to the transaction and determine whether they are "parties in interest" under ERISA.

As a relatively new statute, ERISA contains many issues that remain unresolved. The key substantive issues include ERISA rights and remedies, preemption, the right to contribution or indemnification, the right to trial by jury, and the ability to obtain attorney's fees. Among the most important procedural issues are jurisdiction, venue, service of process, and the applicable statutes of limitations. ERISA also presents several practical issues involving the role of the Department of Labor, problems with conflicts of interest and the attorney/client privilege.

Many ERISA lawyers believe that Congress, in enacting ERISA, wanted federal courts to develop a body of federal common law governing pension and welfare rights and obligations. Courts are specifically authorized to do so under ERISA. Most federal courts, even the United States Supreme Court, however, have resisted. Generally, ERISA rights and obligations have been limited to those expressly set out in the statute. ⁴

Due to the gaps in the total statutory scheme and the reluctance of courts to fill in those gaps, litigants complain that ERISA does not fully protect certain rights. Plaintiffs may sue under 1132(a)(1)(B) of ERISA to recover benefits and to clarify their rights to future benefits under a plan. Nevertheless, the statute makes no mention of consequential or punitive damages for the wrongful denial of benefits. In Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134 (1985), the United States Supreme Court rejected a participant's claim for consequential and punitive damages in such an action.

Similarly, there are problems in ERISA actions based on a fiduciary's duty. 29 U.S.C. 1109(a) holds a fiduciary personally liable for all losses suffered by the plan as a result of a breach of a fiduciary duty, and for any profits made by the defendant through the wrongful use of plan assets. The statute, however, does not provide for relief against non-fiduciaries, even though a common law principle of trusts provides that a non-fiduciary could be liable for "knowingly participating" in a breach of fiduciary duty. Although several circuits have held that ERISA intended to follow the traditional common law rule, that holding is doubtful today. ⁵ Even ERISA express remedies may not be as useful as some plaintiffs have assumed. In 29 U.S.C. 1109(a), a plaintiff is permitted to seek "equitable relief." In Mertens v. Hewitt Associates, 508 U.S. 248 (1993), however, the term "equitable relief" was given a relatively narrow interpretation. The Supreme Court held that it permitted only those forms of relief typically available in equity cases, such as injunctions and restitutions, not compensatory damages. ⁶ In response, plaintiffs are being creative about what constitutes "restitution." And, despite the United States Supreme Court's discussion in Mertens, other courts have endorsed ERISA actions based on equitable principles such as estoppel.

If you represent defendants in civil litigation, the biggest reason to search for ERISA issues is preemption. In ERISA, Congress directed that federal law would preempt other applicable law. ⁷ Because of ERISA preemption, some litigation claims for relief may be precluded. There are several important exceptions. ERISA does not preempt other federal law, criminal law or state laws regulating insurance, banking or securities. The key to ERISA preemption is the term "relate to." ERISA provides that its provisions "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in 1003(a) of this title and are not exempt under 1003(b) of this title." ⁸ The statute does not define the term "relate to"; it has fallen to the courts to deduce Congress's intent and to apply this interpretation to the facts of each case. ⁹

Unfortunately, the United States Supreme Court has given little guidance in defining "relates to," saying only that it has been given a "broad common sense meaning." ¹⁰ And, a state law "relates to an employee benefit plan ... if it has a connection with or reference to such a plan." ¹¹ Many courts and scholars had thought that the limitations of ERISA preemption were boundless. Recently, however, in New York Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, 115 S. Ct. 1671 (1995), the Supreme Court curbed the expansion of the preemption doctrine:

Id. In making its holding, the Court went on to rely upon the "connection with or reference to" language used in prior decisions.

A good example of how the tide on the expansion of the preemption doctrine has turned is found in Morstein v. National Insurance Services, Inc., No. 94-9152 (11th Cir. Aug. 19, 1996) (en banc). In Morstein, the Eleventh Circuit overruled Farlow v. Union Central Life Insurance Company, 874 F.2d 791 (11th Cir. 1989). Farlow held that ERISA preempted a designated beneficiary's state law misrepresentation and negligence claims against an insurance company and its agent. Citing the analysis of the Supreme Court in New York Blues, the Eleventh Circuit looked to see whether the state law claims brought by the insured or participant had a "connection with" the ERISA plan. Following the Fifth Circuit, the Eleventh Circuit held that when a state claim brought against a non-ERISA entity does not affect relations among principal ERISA entities, the claim is not preempted by ERISA.

Insurance agents are not ERISA entities. Therefore, Morstein's claims for fraudulent inducement and negligent processing of an application for an ERISA-governed insurance plan were not preempted. Such claims do not fall within ERISA's broad preemptive scope, as they do not have a sufficient connection with the plan to "relate to" the plan.

The fact that ERISA preempts a state law claim does not mean that ERISA will provide a remedy. ERISA claims may be preempted, even if that leaves the claimant without a remedy. [FN12]

Just as a plaintiff might be shocked to find that he has no remedy under state law when his claim is governed by ERISA, an ERISA defendant may be surprised to learn that there is no clear right to contribution nor indemnity under ERISA. As with other "implied" remedies under ERISA, courts have struggled with the tension between their authority to create federal common law and congressional omission of particular remedies from the statute. The circuit courts are split over whether ERISA creates a right of contribution. ¹³ When faced with a need to assert or defend against a claim for contribution or indemnification, venue might be the key, depending on which circuit you find yourself.

Until recently, there had been no question that ERISA remedies make no provision for recovery of punitive or extracontractual damages. Most federal courts agree that such damages are not recoverable under ERISA. See, e.g., McRae v. Seafarers's Welfare Plan 920 F.2d 819 (11th Cir. 1991). However, based on Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990), many courts, including the Alabama Supreme Court, have determined that "courts are authorized to award damages, both extracontractual and even punitive, where the facts support them, ... though they are not specifically provided for in ERISA." Haywood v. Russell Corp., 584 So. 2d 1291 (Ala. 1991). See also, East v. Long, 785 F. Supp. 941 (N.D. Ala. 1992) (per Acker, J.). Nonetheless, other courts, including the Eleventh Circuit, since Ingersoll- Rand have concluded that ERISA does not authorize extracontractual or punitive damages. ¹⁴

ERISA does not address a plaintiff's right to a jury trial. Until recently, ERISA claims generally were viewed as being "equitable" in nature, meaning that ERISA plaintiffs were not entitled to a jury. ¹⁵

A recent United States Supreme Court decision has created some uncertainty on this point. In Firestone Tire & Rubber Company v. Bruch, 489 U.S. 101 (1989), the Supreme Court noted that ERISA "abounds with the language and terminology of trust law," but also suggested that claims for plan benefits resembled breach of contract actions. More significantly, the Supreme Court held that courts reviewing the acts or omissions of ERISA fiduciaries do so de novo, as opposed to the more deferential arbitrary and capricious standard. Taking their cue from this discussion, some lower courts have viewed benefits claims under 1132(a)(1)(B) as being akin to breach of contract actions, even entitling a plaintiff to a jury trial. ¹⁶ The Eleventh Circuit, however, has soundly rejected the argument that the change in standard of review converts a claim under 1132(a)(1)(B) from an equitable claim to a breach of contract action thereby entitling a plaintiff to a jury trial under the Seventh Amendment.

In Blake v. Unionmutual Stock Life Insurance Company of America, 906 F.2d 1525 (11th Cir. 1990), the Eleventh Circuit held that the nature of a 1132(a)(1)(B) action is for the enforcement of an ERISA Plan. Although plaintiffs may contend that such a claim is for money damages, "in effect they are claiming the benefits they are allegedly entitled to under the plan." Blake, 906 F.2d at 1526. Considering such claims to involve traditionally equitable relief, the Eleventh Circuit held *359 that precluding a jury trial in such cases does not violate the Seventh Amendment guaranty of a jury trial.

If ERISA claims are brought in Alabama state court, a practitioner must scrutinize the claims closely to determine the plaintiff's right to a jury trial. If the claims are purely equitable in nature, no right to a jury trial exists. In Ex parte Gurganus, 603 So. 2d 903 (Ala. 1992), the Alabama Supreme Court held that an action brought under 1132(a)(1)(B), to determine the insurer's right to cancel an ERISA-regulated plan was equitable in nature, and consequently, did not carry a right to trial by jury. On the other hand where punitive and extracontractual damages are sought, a plaintiff has a right to a jury trial in Alabama state courts. See, e.g., Weems v. Jefferson-Pilot Life Ins. Co., Inc., 663 So. 2d 905 (Ala. 1995).

ERISA provides for an award of attorney's fees. Section 1132(g)(1) provides that "[i]n any action [under Title I of ERISA] ...by a participant, beneficiary, or fiduciary, the court in its discretion may allow a reasonable attorney's fee and costs of the action to either party."

The award of fees is discretionary, and fees may be awarded to either party; there is no prevailing-party requirement under this section. ERISA also contains a mandatory fee-shifting provision applicable to cases brought under 1145 of ERISA by multi-employer plans to collect contributions owed them; that provision is limited to prevailing parties.

In deciding whether to award attorney's fees, almost all appellate courts look to (1) the degree of the opposing party's culpability or bad faith; (2) the ability of the opposing party to satisfy an award of fees personally; (3) whether an award of attorney's fees against the offending party would deter other persons similarly situated; (4) whether the parties requesting attorney's fees sought to benefit all participants and beneficiaries of the plan or to resolve a significant ERISA legal question; and (5) the relative merits of the parties' positions. ¹⁷

In federalizing the law of pensions and other employee benefits, Congress gave to the federal district courts exclusive jurisdiction over almost all actions brought under ERISA. ¹⁸ There is one exception: Actions commenced by participants or beneficiaries to recover benefits or to enforce other rights under a plan may be brought in federal or state court. There is no amount in controversy requirement, so ERISA disputes involving even small sums of money often are brought in federal court.

ERISA has special rules for removing actions to federal court. Ordinarily, an action may be removed to federal court if a plaintiff asserts a federal claim in her "well-pleaded complaint." The existence of a federal defense is not a ground for removing the action from state court. Those rules do not apply to ERISA claims.

A claim for benefits under an employee benefit plan, even though styled as a state law breach of contract claim, is an ERISA claim, and the defendant may remove the suit to federal court. ¹⁹ Similarly, a state law claim that an employee was discharged to keep her from vesting in a benefit plan makes out a claim under ERISA, 29 U.S.C. 1140, which prohibits such conduct. Even if the plaintiff never cites ERISA in the complaint, that claim also may be removed to federal court. ²⁰

In 29 U.S.C. 1132(3)(2), ERISA has its own venue provision. It affords plaintiffs great latitude to select a favorable district. Venue is proper in: the district where the employee benefit plan is administered; or the district where the breach of fiduciary duty occurred; or the district where a defendant resides or may be found. Thus, the ERISA plaintiff usually enjoys a wider choice of forum than under the venue provision of 28 U.S.C. 1391.

When combined with the ability to serve and to obtain personal jurisdiction over a defendant in any district or state, these venue rules give ERISA plaintiffs some ability to "forum shop" for the jurisdiction with the most favorable interpretations of the relevant ERISA provisions.

Congress failed to provide much guidance on statutes of limitations for ERISA claims. Of all of the claims available under ERISA, Congress specified a statute of limitations only for breach of fiduciary duty claims, which must be brought before the earlier of: (a) six years from the breach or violation, or (b) three years from when the plaintiff had actual knowledge of the breach of violation. In cases where the breach allegedly was the subject of "fraud or concealment," the action must be brought within six years of the discovery of the fraud or concealment. ²¹ Other state or federal laws provide the applicable limitations period for claims alleging violations other than breach of fiduciary duty.

Whenever a court looks to state law, disputes will arise about which state limitations period to borrow. Some courts have analogized ERISA benefits claims to state claims for wages and have applied the corresponding state statute of limitation. ²² Others hold that a benefits action is similar to a breach of contract claim and apply that limitations period. ²³ Because the limitations period can be critical, it is important to examine state law where jurisdiction and venue are proper prior to initiating a lawsuit.

When a lawyer is approached about representation in a matter involving ERISA issues, it is important to determine the identity of her client and her client's interests. Are you representing an employee, participant or beneficiary? Are you representing the plan, a fiduciary or employer? An executive may have dual loyalties. As a corporate officer, she owes duties to the corporation. If she is a fiduciary under ERISA, her loyalties are to the plan and its participants and beneficiaries. A lawyer may be unable to invoke the attorney-client privilege against participants and beneficiaries if the executive with whom she has had detailed discussions is acting as a fiduciary. At the incipient stages of the litigation, it is important to know the capacity of the person under ERISA of the person with whom you are dealing to avoid potential pitfalls.

Conclusion

Ignorance of ERISA's fundamental principles may be hazardous. Knowing when ERISA governs will avoid wasted efforts and put you in the proper court. Ultimately, ERISA practice does not differ materially from other areas of practice. For most practitioners ERISA work can be rewarding.

1. 29 U.S.C. 1102(2)(A).
2. 29 U.S.C. 1002(1).
3. Id.
4. Massachusetts Mut. Life Ins. Co. v. Russell 473 U.S. 134, 146 (1985).
5. Mertens v. Hewitt Associates, 508 U.S. 248 (1993).
6. Id. at 255-56.
7. Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983).
8. 29 U.S.C. 1144(a).
9. Morstein v. National Ins. Services, Inc., No. 94-9152, slip op. at 2 (11th Cir. Aug. 19, 1996) (en banc).
10. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987).
11. Shaw, 463 U.S. at 96-97.
12. Lee v. E. I. DuPont de Nemours & Co., 894 F.2d 755 (5th Cir. 1990). Contra, Perry v. P*I*E Nationwide, Inc., 872 F.2d 157 (6th Cir. 1989), cert. denied, 493 U.S. 1093 (holding common law claims not preempted because of absence of ERISA remedy).
13. Compare, Chemung Canal Trust Co. v. Souran/Maryland, 939 F.2d 12 (2d Cir. 1991), cert. denied, 112 S.Ct. 3014 (1992), and Kim v. Fujikawa, 871 F.2d 1427 (9th Cir. 1989) (rejecting right to contribution).
14. See, e.g. McRae, 920 F.2d at 819; Harsch v. Eisenberg, 956 F.2d 651 (7th Cir.), cert. denied, 113 S.Ct. 61 (1992).
15. See, Blake v. Unionmutual Stock Life Ins. Co. of America, 906 F.2d 1525, 1526 (11th Cir. 1990).
16. See, e.g., Sullivan v. L.T.V. Aerospace & Defense Co., 850 F. Supp. 202, 214 (W.D.N.Y. 1994).
17. Nachwalter v. Christie, 805 F.2d 956, 962 (11th Cir. 1986).
18. 29 U.S.C. 1132(g)(2).
19. See, Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987).
20. Cf. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990) (holding a state wrongful discharge claim preempted by ERISA because it conflicted with 1140).
21. 29 U.S.C. 1113.
22. See, e.g. Clark v. Coats & Clark, Inc. 865 F.2d 1237 (11th Cir. 1989).
23. See, e.g. Flanagan v. Island Empire Elec. Workers Pension Plan & Trust, 3 F.3d 1246 (9th Cir. 1993).

Copyright (c) 1996 by the Alabama State Bar; Wayne Morse