In 2013, the 6th Circuit made waves in the ERISA world when it held that LINA could be ordered to disgorge almost $3 million in profits it allegedly made on benefits it had improperly withheld, on top of payment of the benefits themselves. A few months later, the court granted LINA’s petition for en banc review, and vacated the 2013 decision .
Last week a divided 6th Circuit vacated the disgorgement of profits in a ruling that restores sanity to ERISA benefits litigation.
First, a little background. Daniel Rochow filed a claim for disability benefits which LINA denied. He sued, asserting claims for benefits under 502(a)(1)(B) (29 U.S.C. § 1132(a)(1)(B)) and damages for breach of fiduciary duty under 502(a)(3) (29 U.S.C. § 1132(a)(3)). The district court ruled that the denial of benefits was arbitrary and capricious, and entered judgment in 2005. LINA appealed, and the 6th Circuit affirmed the decision in 2007. Rochow v. LINA (“Rochow I”), 482 F.3d 860 (6th Cir.2007). Though there was no remand, the parties engaged in various “post-remand” proceedings in the district court. This included plaintiff’s motion for an equitable accounting and disgorgement of profits. The district court granted that motion, and ordered LINA to disgorge just under $3 million in profits it made on the benefits it had withheld. LINA appealed, and a divided panel of the 6th Circuit affirmed, in what the dissent called an “unprecedented and extraordinary step to expand the scope of ERISA coverage[.]” Rochow v. LINA (“Rochow II”), 737 F.3d 415 (6th Cir. 2013). The court granted LINA’s petition for rehearing en banc in February 2014.
Finally, we have Rochow III: Rochow v. LINA, — F.3d –, 2015 WL 925794 (6th Cir. Mar. 5, 2015). The court was divided. Nine judges joined in the majority decision. One joined the majority in part; one joined in part of the majority and part of the dissent; and six judges dissented.
The majority decision first noted that it was not clear that the district court had ever ruled that LINA had breached its fiduciary duty, and, in fact, appeared to have dismissed those claims when it entered judgment prior to Rochow I. Nonetheless, it assumed that the district court found that LINA had breached its fiduciary duty by arbitrarily and capriciously denying benefits.
Putting that procedural issue aside, the majority stated that “[t]here is essentially one issue before us: Is Rochow entitled to recover under both ERISA § 502(a)(1)(B) and § 502(a)(3) for LINA’s arbitrary and capricious denial of long-term disability benefits?” The court held that he was not:
Rochow is made whole under § 502(a)(1)(B) through recovery of his disability benefits and attorney’s fees, and potential recovery of prejudgment interest, discussed below. Allowing Rochow to recover disgorged profits under § 502(a)(3), in addition to his recovery under § 502(a)(1)(B), based on the claim that the wrongful denial of benefits also constituted a breach of fiduciary duty, would—absent a showing that the § 502(a)(1)(B) remedy is inadequate—result in an impermissible duplicative recovery, contrary to clear Supreme Court and Sixth Circuit precedent.
Rochow III held that the Supreme Court had established that 502(a)(3) equitable relief is available only “for injuries caused by violations that § 502 does not elsewhere adequately remedy.” Varity Corp. v. Howe, 516 U.S. 489, 503, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996). Proper analysis of what is, and is not, an injury, precludes the disgorgement order. Specifically, Rochow III held that “[i]nstead of focusing on the relief available to make Rochow whole, the award reflects concern that LINA had wrongfully gained something, a consideration beyond the ken of ERISA make-whole remedies.” The court made explicit the fact that Rochow II was so troubling because it imposed a novel, and significant, measure of damages that would apply virtually across the board:
If an arbitrary and capricious denial of benefits implicated a breach of fiduciary duty entitling the claimant to disgorgement of the defendant’s profits in addition to recovery of benefits, then equitable relief would be potentially available whenever a benefits denial is held to be arbitrary or capricious. This would be plainly beyond and inconsistent with ERISA’s purpose to make claimants whole. Tellingly, the appellate briefing contains citation to no case that allowed disgorgement of profits under § 502(a)(3) after the claimant recovered for wrongful denial of benefits under § 502(a)(1)(B).
The court went on to explain that a claimant can obtain equitable relief under 502(a)(3) in addition to seeking benefits under 502(a)(1)(B) “only where the breach of fiduciary duty claim is based on an injury separate and distinct from the denial of benefits or where the remedy afforded by Congress under § 502(a)(1)(B) is otherwise shown to be inadequate [emphasis in original].” The court rejected Rochow’s arguments that he had two separate injuries, holding:
[I]n an action for wrongful denial of benefits, like this one, the denial of benefits necessarily results in a continued withholding of benefits until the denial is either finalized or rectified. The denial is the injury and the withholding is simply ancillary thereto, the continuing effect of the same denial. Together they comprise a single injury. By withholding payment of benefits until the denial was either finalized or rectified, LINA did not violate a second, distinct duty owed to Rochow and did not inflict a second injury.
The court explicitly held that the wrongful withholding of benefits was not a zero-sum game, in that increased earnings for LINA did not equate to a loss for Rochow: “Nor can it be said that Rochow suffered a second injury, or that his injury was exacerbated, as a result of any gain realized by LINA before it paid the wrongfully withheld benefits. Rochow’s loss remained exactly the same irrespective of the use made by LINA of the withheld benefits.”
The court also rejected Rochow’s argument that CIGNA Corp. v. Amara, — U.S. –, 131 S.Ct. 1866, 1881, 179 L.Ed.2d 843 (2011), eliminated the requirement that he show a separate, distinct injury:
Rochow’s reading misses a logical step: “other appropriate equitable relief” is not necessary to make him whole. While Varity certainly acknowledges the possibility of equitable relief, and Amara outlines the scope of potential equitable relief, when appropriate, the Supreme Court has never stated that recovery under both § 502(a)(3) and § 502(a)(1)(B) may be warranted for a single injury. … Rochow and our dissenting colleagues wholly fail to explain how his § 502(a)(1)(B) remedies are inadequate to remedy his injury [emphasis in original].
Finally, the court remanded the matter to the district court to consider whether Rochow is entitled to prejudgment interest, cautioning that any interest awarded cannot be “at a rate so high that the award amounts to punitive damages.”
The lengthy dissent essentially held that breach of fiduciary duty is a separate claim that by definition results in a distinct injury, and therefore supports a distinct remedy: “LINA injured Rochow in two distinct ways: by arbitrarily and capriciously denying his disability benefits claim and by breaching its fiduciary duties to him. LINA’s denial of benefits breached the Plan terms; LINA’s breach of its fiduciary obligations violated ERISA statutes and added the element of wrongdoing to the contract breach. Equity has long recognized that a trustee (or a fiduciary) who gains a benefit by breaching his or her duty must return that benefit to the beneficiary [brackets and quotation marks omitted].”
An opinion by Judge White, concurring in part and dissenting in part, noted: “There is less light between the two opinions than might appear on the surface.” In particular, she observed that the majority did not foreclose disgorgement as a remedy in all benefits cases, and that the dissent, of course, would authorize it. Thus, she noted: “all appear to agree disgorgement of profits is a potential remedy under ERISA.”
The majority’s focus on the injury, and the reasoning of the dissent, leaves room for creative plaintiffs’ lawyers to attempt to conjure injuries that plausibly could be remedied by disgorgement.