The federal district court decision in Rochow v. Life Insurance Company of North America, No. 04-73628 (March 23, 2012) went unnoticed by most ERISA practitioners after it was issued in 2012, even though the court awarded millions of dollars in disgorged profits to a benefit claimant as appropriate equitable relief under section 502(a)(3) of the Employee Retirement Income Security Act (ERISA). Frankly, most practitioners did not take it seriously. However, now that the decision has been affirmed by the Sixth Circuit Court of Appeals in a rather incredible split decision issued on December 6, 2013, it will likely receive substantial press coverage and be roundly praised and criticized, depending on whether one represents benefits claimants or benefits plans.
The case started out as a routine denial of disability benefits, which was overturned by the district court on a finding that the defendant insurance company had acted arbitrarily and capriciously. It then morphed into a case involving an award of nearly $1 million in benefits, a substantial award of attorneys’ fees, and most disturbingly, a $3.8 million disgorgement of profits judgment against the disability insurer for breach of fiduciary duty. One can only wonder at the potential ramifications of the decision, whether it will withstand review by the full Sixth Circuit Court of Appeals, and how it will fare in other circuits.
Daniel Rochow sued for disability benefits under section 502(a)(1)(B) of ERISA and also sought equitable accounting and disgorgement of profits as “appropriate equitable relief” under section 502(a)(3). The district court determined that Life Insurance Company of North America’s (LINA’s) benefit determination had been arbitrary and capricious. The Sixth Circuit affirmed that decision. When the case was remanded to the district court, Rochow sought an accounting and disgorgement of profits under section 502(a)(3) in addition to an award of nearly $1 million in back benefits and attorneys’ fees. After months of additional discovery, expert opinions, and further hearings, the district court applied a return-on-equity analysis to the disgorgement claim and awarded an additional $3.8 million in disgorged profits against LINA.
In a 2-to-1 decision, the Sixth Circuit affirmed the district court a second time. Among other things, the majority held that ERISA does not bar tandem claims for withheld benefits under section 502(a)(1)(B) and breach of fiduciary duty claims under section 502(a)(3)—even where there is no allegation of a separate injury, aside from the benefit denial, and even though the same alleged fiduciary breach serves as the basis for both types of claims. The panel majority held that because Rochow had sought the disgorgement remedy as a separate type of relief, disgorgement was an appropriate remedy for the arbitrary and capricious benefit denial.
Responding to LINA’s argument that appropriate equitable relief under section 502(a)(3) is intended to be limited to make-whole relief, the majority held that where section 502(a)(3) allows equitable relief “to redress” violations of ERISA, such relief extends not only to relief designed to “set right” the alleged wrong, but also to relief designed to “avenge” the alleged wrong. Amazingly, the majority then went on to suggest that the $3.8 million disgorgement remedy was not “punitive.” The majority also affirmed the district court’s application of a return-on-equity analysis to the disgorgement claim, rather than an analysis offered by LINA that would have equated disgorgement of profits to an award of prejudgment interest on the withheld benefits. The rationale for the more generous disgorgement award was the fact that LINA did not retain the unpaid benefits in a segregated account, but rather retained the money in its general assets.
A vigorous dissent reasoned that the majority decision was both wrong and shortsighted. It was wrong because it was contrary to the Supreme Court’s decision in Varity Corp. v. Howe, 516 U.S. 489 (1996) and to subsequent Sixth Circuit decisions interpreting Varity Corp. to the effect that section 502(a)(3) is inapplicable where relief is available in a benefits claim under section 502(a)(1)(B). The dissent also pointed out that the disgorgement award was a pure windfall to the plaintiff and was contrary to the intent of section 502(a)(3), which is to provide only make-whole relief. The dissent also predicted that the decision would change ERISA benefits cases, which are typically decided on dispositive motions based on a written record, into complex accounting cases with substantial discovery. The dissent also criticized the majority decision as “willfully blind to the negative repercussions that undoubtedly will ensue” in ERISA benefits litigation.
It is too early to determine precisely what impact Rochow will have on ERISA benefits litigation. However, at least in the short term, there is no question that it will create further litigation as benefits claimants and benefits plan fiduciaries attempt to wrestle with how the decision may apply in specific situations. Certainly, plaintiffs’ lawyers will attempt to amend existing complaints and expand such cases beyond what is intended by the statute.