Blogging Employee Benefits

August 15, 2006

En Banc 9th Sets New Conflict Approch for Review Standard

Filed under: Litigation — Fuguerre @ 11:34 pm

We conclude that our earlier opinion in Atwood v. Newmont Gold Co., 45 F.3rd 1317 (9th Cir. 1995), misinterpreted Firestone. We now establish a more comprehensive approach to ERISA cases in which a conflict of interest exists. As we will explain below, abuse of discretion review, tempered by skepticism commensurate with the plan administrator’s conflict of interest, applies here.

Requiring ERISA plan participants to present material, probative evidence of plan administrator conflict of interest unreasonably shifts the burden of proof, according to an en banc 9th Circuit ruling, reversing a previous 9th panel’s decision and rejecting the conflict approach that had been established in the 9th’s own 1995 Atwood ruling. [Abatie v. Alta Health & Life Insurance Company, 03-55601]

The en banc Abatie panel found fault with the Atwood approach on three counts: (1) Atwood failed to adhere to the review standard dichotomy laid out in the Supreme Court’s 1989 Firestone decision, under which a plan granting discretion to the administrator was due review under the abuse of discretion standard; (2) Atwood ignored the Supreme Court’s requirement that the conflict of interest inherent when a plan administrator doubles as its fiduciary weigh in as a factor under the abuse of discretion standard; and (3) Atwood unreasonably placed the burden of proof on plan participants for producing evidence of a potentially conflicted plan administrator’s motives, granting administrators highly deferential review absent “smoking gun” evidence.

That approach wrongly aligns incentives. Instead of being encouraged affirmatively to demonstrate their impartiality and the reasonableness of their decisions, plan administrators are rewarded for suppressing dissent and denying claims with as little explanation as possible.

Returning to Firestone, the en banc Atwood panel calls for an abuse of discretion review whenever an ERISA plan grants discretion to the plan administrator, but takes any conflict of interest into account in the appraisal of whether discretion was abused. Although such an approach is similar to that adopted by other circuits, the 9th consciously rejects the “sliding scale” basis, whereby a court applies less deference as is sufficient to offset the conflict, while recognizing that, “An egregious conflict may weigh more heavily (that is, may cause the court to find an abuse of discretion more readily) than a minor, technical conflict might.”

But in any given case, all the facts and circumstances must be considered and nothing “slides,” so we find the metaphor unnecessary and potentially confusing.

Instead, the 9th calls for a case-by-case “indefinite” abuse of discretion review that weighs conflict on the basis of the particular facts and circumstances. The influence of a potential conflict is to be taken into account, without first requiring the participant to show presence of a serious conflict. Although the burden is not necessarily passed back to the plan administrator, the court suggests that “a conflicted administrator, facing closer scrutiny, might find it advisable to bring forth afirmative evidence that any conflict did not influence its decisionmaking process….”

Although an abuse of discretion review is generally limited to the administrative record, the 9th finds a “subtler question” in how much weight to give a conflict of interest in judging whether discretion has been abused, acknowledging that evidence outside the record could be considered. Moreover, although procedural violations would not necessarily alter the review standard, de novo review is the review standard when an administrator has engaged in “defalcations” that are “so flagrant as to alter the substantive relationship between the employer and employee….”

Finding the district court’s decision in favor of the plan administrator deficient under its fresh approach to conflict and procedural irregularities, the en banc 9th reversed and remanded Abatie for further proceedings. See LawMemo and Workplace Prof Blog for further background leading to this major decision.

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