The Sixth Circuit has just taken an “unprecedented and extraordinary step to expand the scope of ERISA coverage” (in the words of the dissent) by affirming a judgment directing a disability insurer to pay about $900,000 in improperly denied benefits plus disgorge an additional $3,800,000, representing profits it allegedly made on the benefits. I agree with the dissent; this represents a significant expansion of potential liability for ERISA fiduciaries in the Sixth Circuit.
Rochow v. Life Ins. Co. of N. America , 2013 WL 6333440 (6th Cir. Dec. 6, 2013), concerned a company president who began to experience short-term memory loss and other symptoms in early 2001. A visit to his doctor yielded no diagnosis. Rochow was demoted in June 2001 because he could no longer perform his duties. In August 2001, his doctor diagnosed depression, a diagnosis confirmed by a neurologist. He continued to work until January 2002. A month later, he was discovered wandering and incoherent in a parking lot, and was hospitalized. A spinal tap resulted in a diagnosis of HSV-Encephalitis, which is an extremely rare form of herpes that can cause brain trauma not unlike the sort associated with a stroke. His future prognosis was unclear.
LINA denied Rochow’s disability claim. Though it accepted the HSV-Encephalitis diagnosis, and agreed he had suffered from it throughout 2001, it found that he had been able to work with the disease until he stopped work in early 2002.
Rochow sued, asserting claims for benefits and for breach of fiduciary duty. The district court found the determination was arbitrary and capricious, and awarded benefits; the Sixth Circuit affirmed in 2007. Rochow v. Life Ins. of N. America, 482 F.3d 860 (6th Cir. 2007).
On remand, Rochow sought not only the benefits due to him under the disability plan and interest on those benefits (just over $900,000), but also an equitable accounting and disgorgement of the profits LINA allegedly made by withholding those benefits from him. In March 2012, after hearing testimony from expert witnesses on both sides, the district court determined that LINA had been unjustly enriched by withholding the benefits. It also held that the proper measure of LINA’s profit on that money was the “return on equity” measure, which looked at the percentage by which LINA’s net worth grew over the period in question. This resulted in profits ranging from 11% to 39% per year. The final disgorgement was $3,800,000, almost four times the benefits withheld.
LINA appealed, setting the stage for the Sixth Circuit’s dramatic expansion of ERISA liability. After disposing of an argument that the 2005 summary judgment decision had finally disposed of the action and left the district court unable to enter additional relief, the court turned to the disgorgement award.
First, the court ruled that ERISA permitted a participant to recover both the benefits payable under the plan plus additional equitable relief. This ruling conflicts with what appeared to be settled law. Notably, in Varity Corp. v. Howe, 516 U.S. 489 (1996), the Supreme Court held that equitable relief ordinarily would not be available to a participant seeking plan benefits: “where Congress elsewhere provided adequate relief for a beneficiary’s injury, there will likely be no need for further equitable relief, in which case such relief normally would not be appropriate.”
Though the majority acknowledged this language in Varity, and agreed that Varity had “clearly limited” ERISA equitable remedies, it held that there were exceptions to Varity. One exception, the court noted, was a class action in which the plaintiffs sought benefits plus a system-wide injunction against a claims processing technique. Hill v. Blue Cross and Blue Shield of Michigan, 409 F.3d 710, 718 (6th Cir.2005). Another exception was when a participant sought benefits that allegedly were wrongfully denied under the plan, and also sought equitable relief for misrepresentations about how long he would be covered under a different plan provision; there, the injury from the misrepresentation was “a different injury.” Gore v. El Paso Energy Corp. LTD Plan, 477 F.3d 833 (6th Cir. 2007).
The Sixth Circuit labeled this case a “logical extension of the Hill exception to Varity … because § 502(a)(1)(B) cannot provide all the relief Rochow seeks.” Of course, the issue under Varity is not what relief the plaintiff seeks, but what relief is adequate. It is hard to imagine how an award of benefits plus interest is not adequate. The court was untroubled by the fact that the additional relief Rochow sought was more money in his pocket for the denial of his claim (rather than a plan-wide injunction against a claim processing technique). As the dissent pointed out, the majority appeared to disregard the need for a distinct injury to the plaintiff (like in Gore) or the plan (like in Hill) to support a claim for equitable relief on top of a claim for benefits. Rochow plainly had a single injury: the improper denial of his disability claim.
Perhaps equally remarkably, the Sixth Circuit affirmed the determination that LINA’s profit on the benefits it had failed to pay ranged from 11% to 39% per year, which was measured based on return on equity. The court observed that, though “there is a dearth of case law expressly applying the ROE metric to determine unjust enrichment,” using that metric “does not violate any clearly established principle of law or equity.” The court was not at all concerned that the disgorgement was four times the amount of the benefits withheld, noting that whatever profit LINA made on the money rightfully belonged to Rochow.
As the dissent warned, this decision has the potential to allow plaintiffs to expand every abuse-of-discretion claim into a detailed evaluation of whatever measures of profitability they deem most advantageous to them. As the dissent explained: “[D]isgorgement under the circumstances of this case fundamentally alters how denied disability-benefits claims are litigated, forcing district courts to wrestle with complex calculations of profits and raising the specter that any claimant who was arbitrarily and capriciously denied benefits would have a viable claim for disgorgement. … In conclusion, the majority’s approach is an end run around the limitations placed on the use of § 502(a)(3) and is willfully blind to the negative repercussions that undoubtedly will ensue.”
This decision is certain to be raised by plaintiffs’ lawyers as a mechanism to dramatically increase recoveries. It will be important for defense counsel to remind courts of the fundamental limitations on equitable remedies when participants seek plan benefits.