On December 6, 2013, a divided panel of the United States Court of Appeals for the Sixth Circuit held that a plaintiff challenging a denial-of-benefits decision can recover both the denied benefits and disgorgement of any profits made on that amount. See Rochow v. Life Insurance Co. of North America, No. 12-2074 (6th Cir. Dec. 6, 2013). This decision represents a dramatic departure from existing precedent, which has generally held that such a dual award constitutes a double-recovery. A dissenting opinion made exactly this point, noting that the majority opinion represents “an unprecedented and extraordinary step to expand the scope of ERISA coverage.”1
Plaintiff suffered from a debilitating brain infection. After he had left employment, he applied for long-term disability benefits. When his claim was denied, plaintiff sued, alleging that he was entitled not only to the denied benefits under § 502(a)(1)(B) of ERISA, but also “appropriate equitable relief” under § 502(a)(3).2 The district court granted plaintiff summary judgment on his denial-of-benefits claim, and that decision was affirmed by the Sixth Circuit.3
On remand, plaintiff moved for an equitable accounting and disgorgement (in addition to the benefits already awarded), arguing that he was entitled to equitable relief under 502(a)(3) to prevent defendant from being unjustly enriched by its breach. The district court agreed and awarded disgorgement of approximately $3.8 million of defendant’s profits on the withheld disability amount, based on an 11% to 39% annual return on average equity metric.4
The Sixth Circuit’s Decision
Defendant appealed the disgorgement award, but the Sixth Circuit panel affirmed, holding that disgorgement constitutes equitable relief available under § 502(a)(3), and that such an award is not barred merely because plaintiff also recovered the benefit due under § 502(a)(1)(B).5 Although the majority acknowledged that Varity Corp. v. Howe, 516 U.S. 489, 513-15 (1996), and its progeny (including Sixth Circuit precedent6) have been construed “as a complete bar to simultaneous claims for benefits under § 502(a)(1)(B) and breaches of fiduciary duty under § 502(a)(3),”7 it held that this rule did not apply when equitable relief is needed to provide “complete relief” to the plaintiff, and it held that preventing unjust enrichment was one means of providing complete relief.8
The majority also held that the district court had not abused its discretion by calculating profits based on defendant’s return on average equity, rather than its much lower returns on investment income.9 In support of that decision, the Sixth Circuit noted the district court’s “pivotal factual finding” that defendant had commingled the withheld benefit funds, rather than placing them in a separate account, and therefore the funds were akin to normal business funds.10
A dissenting judge opined that disgorgement under § 502(a)(3) should not have been awarded for several reasons. First, because disgorgement is tied to a defendant’s gain rather than a plaintiff’s injury, it is inconsistent with ERISA’s remedial purpose and Varity’s holding that the availability of equitable relief depends on whether there is already “adequate relief for a beneficiary’s injury” under a different provision.11 The dissent noted that courts cannot use § 502(a)(3) ”to exact reparation for” or “avenge” an ERISA violation because the Supreme Court has held that punitive damages are unavailable under that provision.12
Second, the dissent argued that by allowing plaintiff to recover both the denied benefits and disgorgement of profits, the majority had provided plaintiff a windfall – “a second recovery for the same injury.”13 The dissent argued that plaintiff could be made whole by awarding his benefit under § 502(a)(1)(B), along with attorneys fees and prejudgment interest. The dissent noted that the $3.8 million profit award could not could not be characterized as prejudgment interest because it was so disproportionately excessive relative to plaintiff’s actual loss that the award was more in the nature of punitive damages, which are not available under ERISA.14
If the decision stands and is followed by other courts, it will place plan sponsors in a difficult position when making decisions to deny benefits. If a sponsor errs when denying benefits, it will risk not only potential litigation, but also the possibility of disgorgement of profits. As the dissent noted, the majority decision turns every wrongful denial-of-benefit decision into an automatic breach of fiduciary duty. And the majority’s decision is hard to square with existing precedent, which holds that 502(a)(3) relief is generally unavailable for denial-of-benefit decisions.15 However, we think it is likely that defendant will seek further review, either through rehearing en banc from the full Sixth Circuit, or a petition for certiorari to the Supreme Court.
If you have any questions regarding this update, please contract one of the following Sidley lawyers.
|Mark B. Blocker
| Alison V. Potter
Sidley ERISA Litigation Practice
Sidley Austin LLP is a leader in the specialized issues presented by litigation over 401(k) plans, cash balance plans and health and welfare plans. Our firm is representing companies in class action lawsuits throughout the United States involving ERISA plans, and Sidley is experienced in drafting such plans and counseling companies on the regulatory and legislative issues affecting such plans.
To receive future copies of this and other Sidley updates via email, please sign up at www.sidley.com/subscribe
1Id. at 25.
2Id. at 3.
3Id. at 3-4, 12.
4Id. at 4-5.
5Id. at 12.
6See Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609 (1998).
7Rochow, Slip. Op. at 13-14.
8Id. at 14.
9Id. at 5.
10Id. at 20.
11Id. at 25-27.
12Id. at 15 and 27, citing Mertens v. Hewitt Assoc., 508 U.S. 255, 256-58 (1993)
13Id. at 26.
14Id. at 30, citing Ford, 154 F.3d at 618-19.
15See LaRocca v. Borden, Inc., 276 F.3d 22, 28-29 (1st Cir. 2002) (collecting cases for the proposition that “federal courts have uniformly concluded that, if a plaintiff can pursue benefits under the plan pursuant to Section a(1), there is an adequate remedy under the plan which bars a further remedy under Section a(3).”).
Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.