Plan Sponsors Must Be Given Deference in Lawsuits Challenging Ambiguous Plan Terms

A federal appeals court found a district court did not apply the correct standard of review in a case challenging the calculation of lump-sum payments from a defined benefit (DB) plan.

In a lawsuit in which the 6th U.S. Circuit Court of Appeals admitted “This is not an easy case,” the appellate court remanded it back to a district court to redefine the class for “damages” and award damages to the newly defined class.

The case was brought by retirees of the Norton Healthcare defined benefit (DB) retirement plan, accusing the plan of miscalculating lump-sum distributions. The 6th Circuit first denied Norton’s motion to dismiss the case, saying the fact that the parties could not agree on the recalculation of benefits does not make the district court’s judgment less final. “The district court answered all the parties’ merits questions, and found that Norton had misapplied the terms of the Plan. The district court then told the parties exactly how to recalculate those Retirees’ benefits—by using the Retirees’ proposed formula. Thus, there are no unanswered legal or equitable questions in this case. Norton also does not contend it lacks the data necessary to perform the calculations, or that the parties dispute the accuracy or authenticity of the relevant records, so there are no unanswered factual questions either. It is undoubtedly true that the calculations required here are complex and time-consuming… The need for an advanced understanding of applied mathematics to obey an order of the court does not make that judgment any less final for our purposes, the appellate court stated in its opinion.

However, the 6th Circuit noted that Firestone Tire & Rubber Co. v. Bruch, in which an arbitrary-and-capricious standard of review is required by the court if the plan “gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan,” should have been used by the district court. The district court had considered the doctrine of contra proferentum—which a standard used to construe ambiguous terms against the drafter of a contract.

The appellate court said, “contra proferentum is inherently incompatible with Firestone deference. Thus, we hold that when Firestone applies, a court may not invoke contra proferentum to “temper” arbitrary-and-capricious review.”

The 6th Circuit found “tension” in the terms of the plan document, but no ambiguity. However, it noted that the Employee Retirement Income Security Act (ERISA) requires that any lump-sum alternative be the “actuarial equivalent” of the basic-form benefit, and because the district court did not address actuarial equivalence, a remand is necessary to answer this question. In addition, since the district court was obligated to consider the evidence in the light most favorable to Norton, the appellate court said this would “naturally” include Norton’s experts’ explanation of how the actuarial conversions work. 

“Because there is a genuine issue of material fact, and because we have altered the district court’s interpretation of the plan, neither party is entitled to summary judgment on this question. We therefore vacate the district court’s grant of summary judgment and remand for further examination of the actuarial-equivalence issue,” the 6th Circuit wrote in its opinion.

Regarding a statute of limitations issue on the retirees’ claims, the appellate court agreed with the retirees that the district court should have applied a longer limitations period to their underpayment claims. The appellate court noted that “ERISA does not explicitly provide a limitations period for Section 1132(a)(1)(B) claims,” so “courts fill the statutory gap using federal common law.”  In previous cases, it has held that “when a plaintiff seeks benefits under the plan and those claims depend on alleged violations of ERISA’s statutory protections, Kentucky’s five-year limitations period applies.”  However, when a claim is based on the contract alone, then Kentucky’s longer statute of limitations—15 years—for contract claims applies. To the extent that the retirees’ claims are based solely on the improper interpretation of the plan terms, the 6th Circuit said the longer contract limitations period must apply.

Regarding the district court’s class certification, the appellate court said it is clear from the record that the amount of any individual class member’s award may vary wildly depending on their circumstances. It said this should have prompted the district court to consider the due-process concerns highlighted by the Supreme Court in Dukes v. Wal-Mart Stores. “On remand, the district court must address this issue prior to certifying a damages class under subrule (b)(2). In sum, to the extent that the district court certified the class for plan-interpretation purposes, that decision is affirmed. To the extent that its certification extended to damages calculations, we vacate the certification and remand for further proceedings consistent with this opinion,” the opinion states.