High Court Rules ERISA Plan Administrator’s Interpretation Is Entitled To Deference

On April 21, with Chief Justice John Roberts writing for the majority, the U.S. Supreme Court upheld its Firestone Tire & Rubber Co. v. Bruch standard for reviewing the decisions of plan administrators where those decisions are made following a court determination that a previous interpretation of the same plan terms was arbitrary and capricious. Under Firestone and the terms of the Xerox Corporation pension plan at issue in this case, pension plan administrators would normally be entitled to deference when interpreting the plan. The Court held that the same deference also should apply where the administrator made a good faith error in its previous interpretation. The Court reversed the Second Circuit Court of Appeals’ decision crafting an exception to Firestone deference and holding 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 the Employee Retirement Income Security Act (ERISA). Conkright v. Frommert, No. 08–810, U.S. Supreme Court (April 21, 2010).

Factual Background

The case concerns Xerox Corporation’s pension plan, which is covered by ERISA. In the 1980’s, a group of Xerox employees left the company and received lump-sum distributions of retirement benefits they had earned up to that point. When these workers were rehired, a dispute arose as to how to account for their past distributions when calculating their current benefits, or as the Court put it, “how to avoid paying respondents the same benefits twice.”

The plan’s current and former administrators (Plan Administrator) initially interpreted the plan to call for the “phantom account” method, which calculates the hypothetical growth that the workers’ past distributions would have experienced if the money had remained in Xerox’s investment funds and reduces their present benefits accordingly. The workers filed suit challenging the use of the phantom account method.

The district court granted summary judgment for the plan, applying a deferential standard of review to the Plan Administrator’s interpretation. The Second Circuit vacated and remanded, holding that the Plan Administrator’s interpretation was unreasonable. On remand, the district court considered other approaches and the Plan Administrator submitted an affidavit proposing a new approach that, unlike the phantom account method, did not calculate the present value of a past distribution based on events that occurred after the distribution was made.

The district court did not apply a deferential standard of review to this approach or accept the Plan Administrator’s interpretation and instead, it adopted an approach proposed by the workers. The Second Circuit held that the district court was correct not to apply a deferential standard. The Second Circuit concluded that a court need not apply a deferential standard “where the administrator ha[s] previously construed the same [plan] terms and we found such a construction to have violated ERISA.”

The Supreme Court granted certiorari on two questions (but found it necessary to decide only the first): (1) whether the district court owed deference to the Plan Administrator’s interpretation of the plan on remand, and (2) whether the Second Circuit properly granted deference to the district court on the merits.

Legal Analysis

The Supreme Court had previously addressed the standard for reviewing the decisions of ERISA plan administrators in Firestone Tire & Rubber Co. v. Bruch, where, looking to principles of trust law, the Court decided that if trust documents give the trustee “power to construe disputed or doubtful terms, … the trustee’s interpretation will not be disturbed if reasonable.” The Court expanded on this approach in Metropolitan Life Ins. Co. v. Glenn, holding that a deferential standard of review remains appropriate even in the face of a conflict when the terms of a plan grant discretionary authority to the plan administrator.

On the basis of this precedent, the Court ruled that given the terms of the plan it was “undisputed” that the Xerox Plan Administrator normally would be entitled to deference when interpreting the plan. Moreover, the Court rejected the Second Circuit’s exception to Firestone deference under which the district court was entitled to reject the Plan Administrator’s reasonable interpretation of the plan solely because the Second Circuit had overturned a previous interpretation by the Plan Administrator. The Court ruled that the Second Circuit’s “one-strike-and-you’re-out” approach had no basis in the Firestone holding, especially in light of the fact that the Court refused to carve out an exception to Firestone in the subsequent case of Glenn, which involved a systemic conflict of interest. The Court noted that, “it is difficult to see why a single honest mistake would require a different result.”

Finding that trust law does not resolve this case, to support its decision the Court relied on the guiding principles underlying ERISA. The Court recognized 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.” Firestone deference protects these interests by promoting efficiency (i.e., encouraging resolution of disputes through internal administrative proceedings rather than through litigation), by promoting predictability (i.e., allowing an employer to rely on the expertise of plan administrators rather than the possibly inaccurate plan interpretations that might result from judicial review), and by promoting uniformity (i.e., avoiding “a patchwork of different interpretations of a plan, like the one here, that covers employees in different jurisdictions”). Thus, the Court concluded that the “careful balancing” on which ERISA is based is preserved by permitting an employer to grant primary interpretive authority over an ERISA plan to the plan administrator.

Finally, the Court rejected the argument that Firestone deference would encourage plan administrators to adopt unreasonable interpretations of plans in anticipation of a second chance, thereby undermining the goal of prompt resolution of benefits disputes. Finding these arguments “overblown,” the Court noted that “applying a deferential standard of review does not mean that the plan administrator will prevail on the merits. It means only that the plan administrator’s interpretation of the plan ‘will not be disturbed if reasonable.’” The Court also suggested that multiple erroneous interpretations of the same plan provision, even if in good faith, might support a finding that the administrator was not competent to exercise discretion fairly and that additional opportunities to reinterpret the plan might not be permitted.

Thus, the Court held that the Second Circuit erred in holding that the district court could refuse to defer to the Plan Administrator’s interpretation of the plan simply because the Second Circuit had found the Plan Administrator’s previous interpretation to be invalid.

Writing for the dissent, Justice Stephen Breyer noted that the Plan Administrator incorrectly interpreted the plan, criticized the district court’s ruling, and rejected the Court’s interpretation of the affect of trust law on this case. According to the dissent, “the controlling trust law principle appears to be that, ‘[w]here the court finds that there has been an abuse of a discretionary power, the decree to be rendered is in its discretion.’”

Practical Impact

According to Mark Schmidtke, a shareholder in Ogletree Deakins’ Chicago office, “This decision has a significant impact on situations where a court overturns an administrator’s application of a plan provision and either remands the matter to the administrator for further review or the administrator proffers a different interpretation when the benefit determination is challenged in court. Overall, the decision protects discretionary authority and keeps it where ERISA intended it to be – in the hands of plan fiduciaries. Of course, there are limits on an administrator’s ability to re-interpret the plan and either lack of good faith or multiple unsuccessful interpretations of the same plan provision might, at some point, require forfeiture of judicial deference.”

A shareholder in the firm’s Greenville office, adds, “This decision illustrates the importance of including language in plan documents that clearly delegates discretion to a plan fiduciary to interpret and apply plan terms. A plan fiduciary does not get the benefit of a review by a court under the arbitrary and capricious standard of review if discretionary language (often referred to as “Firestone language”) is not included in the plan document. Additionally, the plan fiduciary must actually exercise the discretion granted to it to take advantage of review under the arbitrary and capricious standard.”