Thursday, April 22, 2010

Supreme Court Rejects "One Strike And You're Out Approach" To Review Of Plan Administrators' Decisions

The Supreme Court handed down a significant - and, quite frankly, obvious and unnecessary - benefits decision yesterday. In Conkright v. Frommert, No. 08–810, participants in an ERISA pension benefit plan, who had left the employment of Xerox Corp., received lump-sum distributions and later been rehired by Xerox, sued Xerox and others for improper calculation of their benefits. Following a partial grant of Xerox's motion to dismiss, the United States District Court for the Western District of New York granted summary judgment for Xerox, and the participants appealed. The Second Circuit Court of Appeals, affirmed in part, vacated in part and remanded. On remand, following the recalculation of benefits by Xerox, the District Court declined to afford Xerox's determination any deference based on Xerox's earlier error, and entered order from which the defendants appealed. The Court of Appeals affirmed in part, vacated in part and remanded. Certiorari was granted by the Supreme Court.

The Supreme Court held that the District Court should have applied a deferential standard of review to the Plan Administrator's interpretation of the Plan on remand. The Supreme Court noted that its earlier decision in Firestone Tire & Rubber Co. v. Bruch looked to “principles of trust law” for guidance, and that under trust law, the appropriate standard depends on the language of the instrument creating the trust. When a trust instrument gives the trustee “power to construe disputed or doubtful terms, ... the trustee's interpretation will not be disturbed if reasonable." Under Firestone and the Xerox Plan's terms, the Plan Administrator should have been entitled to deference when interpreting the Plan. The Supreme Court noted, however, that the Court of Appeals below had crafted an exception to Firestone deference, when it held that a court need not apply a deferential standard when a plan administrator's previous construction of the same plan terms was found to violate ERISA. The Supreme Court noted that the Second Circuit's “one-strike-and-you're-out” approach had no basis in Firestone, which set out a broad standard of deference with no suggestion that it was susceptible to ad hoc exceptions. The Supreme Court also noted that it had recently held in Metropolitan Life Ins. Co v. Glenn, that a plan administrator operating under a systemic conflict of interest is nonetheless still entitled to deferential review. In light of that ruling, the Court found it difficult to see why a single honest mistake should require a different result. The Court also noted that ERISA represents a “ ‘careful balancing’ between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans,” and that Firestone deference preserves this “careful balancing” and protects the statute's interests in efficiency, predictability, and uniformity.