WHAT HAPPENED CIGNA had a traditional defined benefit pension plan - - PDF document

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VOL. 24, NO. 3 AUTUMN 2011 B ENEFITS L AW JOURNAL From the Editor Imagine a World of Perfect Disclosure Supreme Court Unsuccessfully Searches for a Remedy in Amara v. CIGNA rom the beginning of ERISA, the courts have struggled to supply F

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BENEFITS LAW

JOURNAL

VOL. 24, NO. 3

AUTUMN 2011

Imagine a World of Perfect Disclosure

Supreme Court Unsuccessfully Searches for a Remedy in Amara v. CIGNA

rom the beginning of ERISA, the courts have struggled to supply a suitable remedy for a disclosure violation. The law requires employers to give participants a simple, understandable description

f their plan benefits and to notify them of any changes in those
benefits. However, ERISA is silent as to what should be done when,

inevitably, disclosure mistakes are made. Amara v. CIGNA (No. 09- 804, 5/16/11; 563 U.S. ___ (2011)) highlights the difficulty of balanc- ing the two competing interests in such situations. On one side are the plan participants, who may have been harmed by misleading, incomplete, or incorrect information provided by the company. At the same time, an overly protective judicial approach actually can harm participants by discouraging litigation-weary employers from trying to distill ERISA plan complexities into reasonably plain English

r, far worse, from even offering meaningful benefit programs.

In CIGNA , the District Court clearly understood what is at stake. However, it came up with a faulty solution, holding that CIGNA’s “misleading” communications caused participants “likely harm” that should be remedied by the Court amending the plan document to award the benefits CIGNA purportedly promised to give its employ-

ees. The Supreme Court correctly remanded the lower Court’s deci-

sion, holding that plan summaries and the like do not trump the actual plan documents. But in his majority opinion, Justice Breyer added an unhelpful and misguided stream-of-conscience discussion

f equitable remedies that the lower court could consider on remand.

Forgoing a chance to add clarity and balance for courts searching for From the Editor

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a reasonable approach to disclosure errors, CIGNA instead adds some quotable dicta that may help some actual and would-be victims of bad disclosure, but it also is likely to harm many more workers by making it more expensive and difficult for employers to offer top- shelf benefit programs. WHAT HAPPENED CIGNA had a traditional defined benefit pension plan with a generous formula, including subsidized early retirement benefits, that favored long-service and older employees. When CIGNA decided to join the ranks of employers struggling to maintain their defined benefit plans, it could have frozen or terminated the plan; instead, however, it switched to a cash balance formula. Under the new plan structure, each participant’s annual pension was frozen and then reconfigured as a starting account balance that would grow with annual interest credits and additional amounts contributed by CIGNA for each year of future

employment. CIGNA’s cash balance conversion used the “wear-away”

approach, meaning that if the participant’s frozen traditional pension benefit was more valuable than his or her cash balance benefit, he

r she would be paid the traditional benefit and get nothing from the

cash balance account. Depending on the participant’s age, years of service and salary, and the plan’s particulars, the frozen benefit might end up more valuable than the cash balance benefit even after several years of additional participation; in other words, participants initially might not earn any additional benefits under the new program. Some CIGNA pension plan participants were adversely affected by this wear-away approach because first, the traditional pension included subsidized early retirement benefits that were excluded in figuring the starting cash balance and, second, because the cash balance program (but not the traditional plan) paid full benefits if a participant died before retirement and thus imposed a preretirement mortality charge. Regardless of whether the wear-away approach is the best way to design a plan conversion, the CIGNA plan was fully compliant. Before the cash balance redesign was even completed, CIGNA informed employees of the changes. Beginning with a polished con- sultant-crafted announcement, participants received a series of let- ters, kits, summary of material modifications (SMMs), summary plan descriptions (SPDs), and ERISA Section 204(h) notices of the change in formulas. Some participants cried foul and eventually began a class action attempting to restore the old formula. THE DISTRICT COURT HAS ITS SAY In what is now well-settled law, the Connecticut District Court ruled in February 2008 that CIGNA’s actions in switching to a cash

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balance approach were perfectly legal under ERISA, the Internal Revenue Code, and age discrimination rules. [599 F. Supp. 2d 192 (Conn. 2008)] However, the Court found that CIGNA’s employee notices “failed to properly explain the wear-away” and deliber- ately “misled” participants to avoid an “employee backlash likely to result from a thorough discussion” of the changes. In a second

pinion in June 2008, the District Court found that participants had

been “likely harmed” by CIGNA’s faulty and misleading disclosures. It ruled the appropriate remedy was for the Court to modify the plan’s terms to eliminate the wear-away that CIGNA failed to properly disclose. [534 F. Supp. 2d 288 (Conn. 2008)] In other words, the lower court ruled that employees were entitled to their frozen pension plus the new cash balance benefits, instead of the better

f the two benefits.

Interestingly, the District Court believed that the only available remedy in this case was to rewrite the plan document and allow participants to sue under ERISA Section 502(a)(1) to recover their benefits, per the plan terms as amended by the Court. The District Court read the Supreme Court’s opinions ( Variety v. Howe ; Sereboff

v. Mid Atlantic

; Great-West v. Knudson ; and Mertins v. Hewitt ) interpreting the limits of “appropriate equitable relief” under ERISA Section 502(3) as preventing an award of additional benefits beyond what the plan calls for as improper monetary relief. The District Court’s two opinions were rubber-stamped by the Second Circuit per curium , which surprisingly didn’t choose to weigh-in on this important issue. The District Court’s decisions were disturbing for two reasons. First, it held that mistaken plan summaries can, in effect, have the conse- quence of rewriting the plan document if the summary gives participants a better deal than the actual plan. Second, the District Court determined that it could rewrite the plan document if it appeared that participants were likely harmed by the misleading disclosure, without any proof of actual harm. THE SUPREME COURT COUNTERS Justice Breyer’s opinion made quick work of the District Court’s view that the likely harm caused by CIGNA’s disclosure violations gave the Court license to rewrite the terms of the plan. The eight Justices (Justice Sotomayor did not participate) unanimously agreed that ERISA Section 502(a)(1)(B) allows participants to sue to enforce the terms of a plan, but that ERISA does not authorize a court to change the terms of a plan document. Thus, a participant cannot sue to enforce the terms of a plan summary. The Supreme Court correctly recognized that if summaries could be enforced as plan documents, the summaries would be written in complete legalese, as if they were

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plan documents, and would thus be completely unintelligible to participants. DANCE OF DICTA Then, in what Justice Scalia wrote in his concurrence (joined by Justice Thomas) was “purely dicta,” Justice Breyer embarked on a lengthy discourse as to what other relief the District Court might wish to consider on remand. Justice Breyer focused his attention on ERISA Section 502(a)(3), which allows participants to sue for “other appropriate equitable relief.” Once again when dealing with this section, the Court journeyed through the dusty and arcane common law distinction between courts of law and equity, citing centuries-

ld precedents. Justice Breyer said he feared the District Court might

have misread the several Supreme Court decisions on the scope of appropriate equitable relief. Of course, like the District Court, many ERISA lawyers also read the Supreme Court’s rulings the same way: that unless a participant could prove he or she detrimentally relied on a bad disclosure, awarding extra benefits is not permitted as appropriate equitable relief under ERISA. Justice Breyer then suggested two possible ERISA equitable remedies for misleading disclosure. The first was the well- established doctrine of detrimental reliance: if a participant relied on the bad disclosure, the employer must make good his or her loss. Participants have generally found it difficult to win on detrimental reliance, often because while they may have been disappointed that their benefits weren’t as generous as expected, they weren’t injured. CIGNA is a perfect illustration. Most participants would have ended up in the same position whether the disclosure was precise or misleading: working for CIGNA and earning whatever benefits they were entitled to under the new plan. It is improbable that more than a hand- ful would have changed jobs, demanded and received a larger raise,

r taken other action had they known about the wear-away. More

to the point, it is rather difficult to bring a class action suit for damages from relying on poor disclosure. The proof of reliance and the resulting damages are specific to each participant and, as in CIGNA’s case, probably nonexistent for many members of the “class.” This prompted Justice Breyer to ponder whether the participants might be entitled to a surcharge—an equitable remedy where participants are “made whole following a breach ....” According to his think- ing, surcharge is a flexible remedy where the participants would have to show “actual harm” by a preponderance of evidence to collect. What type of harm? The opinion observed that it “was not difficult to imagine how the [ERISA disclosure violations] injured employees even if they did not act in reliance on the summary documents—which they might not have even seen ” [emphasis added]. The opinion further

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imagined water cooler conversations in which the otherwise unin- formed and oblivious would have heard and then been somehow injured by the misleading description of the new wear-away formula. (As an aside, keep in mind that CIGNA was then a leading player in the pension, 401(k), and retirement business. Presumably, at least some of its army of in-house actuaries, lawyers, and consultants would have quickly seen through the bad disclosure and would have known from the start what the deal was.) Still, the Court was clear that merely the judicially assumed “likely harm” was not sufficient; the plaintiffs must prove actual harm. Finally, Justice Breyer expounded that the participants may have been damaged by the violation of their ERISA right to accurate disclosure, which he implied might be remedied by—wait for it—just as the District Court ruled, giving participants both the frozen traditional and the cash balance benefits. The case was then punted back to the District Court to consider what equitable remedies would be appropriate given the “general principles” discussed in the majority

pinion. I haven’t read any eighteenth century law treatises lately, but

the surcharge remedy described by the majority, in what Justice Scalia correctly called dicta, sounds awfully similar to the money damages that the Supreme Court has consistently held are not available under ERISA. SUR-CHARGE! CIGNA

ffers something for everyone. For defendants, the Supreme

Court discarded the notion that faulty or misleading SPDs and other ERISA-required disclosure can be transformed into binding plan

amendments. Further, the remedy of unjust reliance/equitable estop-

pel remains an available remedy for participants who can show actual harm (not just disappointment) for bad disclosure. For plaintiffs, there are some well-turned phrases on surcharge as the new ERISA appropriate equitable relief, which they will vigorously argue was not dicta. Interestingly, the Fourth Circuit ruled, on the same day the Supreme Court’s CIGNA decision was issued, that surcharge was not an available remedy to a beneficiary of an ineligible death benefit plan participant for the fiduciary breach of incorrectly enrolling the would-be participant ( McCravy v. Metropolitan Life Insurance Co. , No.-1074, 5/16/11). The upshot is that rather than a fair and reasonable solution for fixing bad disclosure, we’re left with an all-or-nothing approach in which participants receive either the incorrectly described more generous benefits, or get nothing because they were disappointed but not harmed—with the result depending on the particular judge the parties draw. We still don’t have a middle-ground remedy that would require employers to pay or do something to correct their

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bad disclosure without providing huge windfalls of unintended benefits. At the end of the day, some portion of the 25,000 CIGNA participants affected by the wear-away may see a bump-up in their pension benefits. CIGNA will also make it easier for some plaintiffs to win or favorably settle class actions for bad disclosure. Looking at the larger picture, we’ll see SPDs, SMMs, and other documents becoming so dense they essentially are not disclosures at all but merely materials written by one set of lawyers and read by other lawyers searching for something to sue over. More important, CIGNA creates another reason why employers may decide it’s just not worth the bother and expense to offer ERISA-regulated benefits. It’s safer and simpler to stick to the bare minimum (or nothing)—maybe boost pay a bit—and let employees fend for themselves in preparing for retirement. David E. Morse Editor-in-Chief K & L Gates LLP New York, NY Reprinted from Benefits Law Journal Autumn 2011, Volume 24, Number 3, pages 1-6, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com