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ERISA preemption: denying employees' rights to benefits.

The Employee Retirement Income Security Act of 1974 (ERISA)(1) was enacted to uniformly govern the administration of employee benefit plans and to protect the rights of the beneficiaries under the plan. Sometimes, a federal statute enacted to protect employees' rights can be used to deny them. This is the case with ERISA. Insurance companies often argue the statute preempts plaintiffs' state law bad faith claims for benefits denied. This article begins with an overview of the statute and then focuses on the preemption issue.

To fall within ERISA, an employee benefit plan must be

* a plan, fund, or program that is

* established or maintained by an employer or by an employee organization

* for the purpose of providing for its participants or beneficiaries medical, surgical or hospital care, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs or day care centers, scholarship funds or pre paid legal services.(2)

A plan is not an ERISA plan if

* the employer makes no contributions toward the premiums;

* employee participation is voluntary;

* the employer's sole functions are, without endorsing the program, to allow the insurer to publicize it to the employees, to collect premiums through the payroll deduction, and to remit them to the insurer; and

* the employer receives no compensation for administering the program other than reasonable compensation for services rendered in connection with the payroll deductions.(3) This arrangement has adverse tax consequences and, thus, is not a common type of plan.

The concept of a fiduciary is important under ERISA because failure to pay a valid claim is a breach of fiduciary responsibility. A fiduciary is a person who is granted discretionary authority by the plan or exercises discretion over the management of plan assets or discretionary control over plan administration.(4)

Fiduciaries have a duty to act "solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries."(5) Courts are guided by general principles of trust law in interpreting the language of ERISA plans and determining breach of fiduciary duty.(6)

A participant or beneficiary may bring a civil action against a fiduciary, who is liable under [sections]1109 for breach of fiduciary duty causing harm to the plan.(7) Section 1109 provides that fiduciaries who breach their duties are personally liable to make good any losses to the plan and to restore any profits made through use of plan, assets. Also, fiduciaries are subject to equitable or remedial relief that a court deems appropriate, including removal of the fiduciary. Defendants may be the plan fiduciaries and the plan itself.(8) Defendants who may have fiduciary status include the plan administrator, the plan sponsor, the employer, and others who acquire this status by their relation to the plan or its assets.

ERISA jurisdiction vests in the federal district courts.(9) An action for recovery of benefits under the plan, however, may be filed in either federal court or a state court of competent jurisdiction as long as the case requires interpretation of the plan's terms, not of ERISA.(10)


ERISA contains a preemption clause, which says that the act supersedes state laws insofar as they relate to an employee benefit plan.(11) To determine whether ERISA preempts a state law, the following question must be answered. Does the law "relate to" an employee benefit plan? If no, the state law applies. If yes, the state law may be preempted by ERISA.

A state law relates to an employee benefit plan if it has a connection with or refers to such a plan. A law refers to a plan where the law acts immediately and exclusively upon ERISA plans, or where the existence of such plans is essential to its operation. Courts look to both ERISA's objectives as a guide to the scope of the state law and the nature of the law's effect on ERISA plans.(12)

ERISA also includes a savings clause, which provides that state insurance laws are not preempted.(13) A state law regulates insurance if

* it has the effect of transferring or spreading a policyholder's risk,

* it affects an integral part of the policy relationship between the insurer and the insured, and

* its requirements are limited to entities within the insurance industry.(14)

Nevertheless, under the "deemer clause" a state may not deem an ERISA plan to be an insurance company merely because the plan provides benefits.(15) There must be an indemnity aspect in the plan in order for the savings clause to apply.

In addition to the savings clause, ERISA also exempts from preemption certain kinds of employee benefit plans, including plans (1) purchased by government and church employers; (2) maintained only for the purpose of complying with workers' compensation, unemployment compensation, Or disability laws; and (3) maintained outside the United States primarily for the benefit of nonresident aliens. Excess benefits plans are also exempt.(16)

Plan document and administrative remedies

ERISA includes reporting and disclosure requirements designed to protect employees' rights to benefits. An administrator's noncompliance with these requirements will not entitle participants to relief unless they have suffered harm.(17) The plan document is summarized by a Summary Plan Description--a disclosure document that advises participants of their rights under the plan.(18) Although misstatements in the description do not give rise to liability, they may bind the administrator if they conflict with the plan document, making benefits available.(19)

In construing benefits plans, ambiguities in the language are construed in favor of participants.(20) Language that is not ambiguous should be interpreted without referring to the claimant or plan administrator's interpretation.(21)

Although there is no express statutory provision in ERISA that requires exhaustion of administrative remedies, courts generally have interpreted the statute to imply that Congress intended that claimants exhaust the administrative remedies specified in the plan document before initiating an action in court.(22) Participants must comply with the substantive and procedural requirements in the plan document.(23) Futility of exhaustion may be an exception.

Judicial review

ERISA provides for judicial review of a denial of benefits.(24) When the administrator has denied benefits and the plan document gives the administrator or the fiduciary the authority to determine whether benefits should be granted, the arbitrary and capricious standard of review should be applied.(25) This standard requires courts to determine whether, based on the facts known to the administrator or fiduciary at the time the decision was made, there was a reasonable basis for the denial.(26) Where there is no delegation of authority to the administrator or fiduciary to do the above, the de novo standard of review applies.(27)

Recently, courts have recognized the conflict of interest inherent in the fiduciary's decision whether to pay benefits. Follow the money. If the fiduciary pays the benefits from its pocket, there is a conflict. When a beneficiary can show a substantial conflict of interest on the part of a fiduciary who denied benefits, the burden shifts to the fiduciary to show that the decision was not tainted by self-interest.(28)

The federal circuits are divided on whether a reviewing court may consider evidence not presented to the plan administrator during the administrative process. Some have held this evidence may not be considered.(29) Others have permitted it so the court can determine whether the benefits should be paid.(30)


ERISA provides that plan participants can sue to recover benefits due under the plan, to enforce their rights, or to clarify their right to future benefits.(31)

As previously stated, participants can bring a civil action against fiduciaries. Participants can also bring a suit to enjoin conduct that violates ERISA or the plan's terms or to obtain other equitable relief in order to redress the violations or enforce any provisions of the act or the plan's terms.(32) The issue arises whether these sections permit employees to recover compensatory or punitive damages for wrongful denial of benefits.

In Massachusetts Mutual Life Insurance Co. v. Russell,(33) a participant sued her insurer under [sections]1132(a)(2) for violating [sections]1109(a), arguing she could receive extra-contractual damages. The Supreme Court ruled that employees cannot personal!, obtain compensatory or punitive damages under [sections]1132(a)(2). The Court said the section permits only remedies that flow to the plan, not to individuals. The Court expressly reserved the issue of whether such damages are recoverable under [sections]1132(a)(3).

Nine circuits that considered the issue have found that based on Russell, extra-contractual damages are not recoverable under either section.(34)

In Mertens v. Hewitt Associates,(35) plaintiffs sued their retirement plan's actuary, a nonfiduciary, under [sections]1132(a)(3) for plan benefits lost because of the actuary's negligence. The Supreme Court held that relief under [sections]1132(a)/[sections]1109(a) applies only to fiduciaries. Noting that [sections]1132(a)(3) permits suits for other appropriate equitable relief, the Court also ruled that money damages are not equitable and, thus, not recoverable.

Attorney fees

Attorney fees, as well as the costs of the action, are available to the client.(36) Awarding them is within the court's discretion.(37) Where the services the attorney rendered were beneficial or necessary to administering the fund, attorney fees are available to the prevailing and nonprevailing party.(38)

In determining whether attorney fees should be awarded, courts have considered

* the degree of the opposing party's culpability or bad faith,

* the opposing party's ability to satisfy an award of fees,

* the likelihood that an award of fees against the opposing party would deter other people who are acting under similar circumstances,

* the intention of the party seeking fees to benefit all participants and beneficiaries as a whole, and

* the relative merit of the partys' differing positions.(39)

In general, ERISA provides that a party, not an attorney, is eligible to receive attorney fees. This award may coexist with a private fee agreement, and the parties may waive, settle, or negotiate these costs.(40) Fees are usually based on the attorney's loadstar--a reasonable number of hours times a reasonable hourly rate.

Right to jury trial

Courts are divided over whether there is a right to a jury trial in suits brought to recover ERISA benefits. If the case resolves legal rather than equitable rights--for example, an action rooted in traditional contract law to recover plan benefits--the plaintiff is entitled to a jury trial. In determining whether the case will resolve legal rights, courts must compare the case to 18th-century actions brought in the courts of England before the merger of the courts of law and equity. If the claim was unknown then, courts must look to an analogous claim that existed and determine if the remedy sought is legal or equitable in nature.(41)

Managed care preemption

Managed care did not have the market penetration 23 years ago when ERISA was passed. Today, it is an increasing concern for lawyers whose client takes part in an employer-sponsored health benefit plan and wants to sue an HMO for malpractice.

Typically, defendants confronted with such suits file a notice of removal to federal district court based on preemption. In response, plaintiffs should file a motion to remand based on the well-pleaded-complaint rule, which requires plaintiffs to state exclusively a state cause of action on the face of their complaint. A federal defense such as preemption then should not support removal. Unless a court would have had jurisdiction over the claim as it was originally filed, a case cannot be properly removed to federal court.

The HMO will argue that its ERISA defense invokes the complete preemption doctrine--an exception to the well-pleaded complaint rule providing that Congress may so completely preempt a particular area that any civil complaint raising this select group of state claims is to be characterized as federal.

ERISA preemption of state medical malpractice claims against HMOs depends on whether the claim has a connection with or reference to a benefit plan. Some courts have found preemption;(42) others have not.(43)

With the increasing litigation of employee benefits, a body of common law is evolving to interpret and supplement ERISA The remedies available are equitable. This challenges counsel to use traditional remedies such as disgorgement, accounting, and restitution to protect the rights of their clients under ERISA. Counsel should also grasp the unique opportunity to develop common law to preserve the provision of quality health care.


(1.) 29 U.S.C. [subsections]1001-1461 (1982).

(2.) ERISA, [sections]3(1) and (2); 29 U.S.C. [sections] 1002(1).

(3.) 29 C.F.R. [sections]2510.3-1(j).

(4.) 29 U.S.C. [subsections]1002(21)(A), 1104(a)(1).

(5.) Id. [sections]1104(a)(1).

(6.) Tiemeyer v Community Mut. Ins. Co., 789 F.Supp.894 (S.D. Ohio 1992).

(7.) 29 U.S.C. [sections]1132(a)(2).

(8.) Id. [sections]1132(d)(1).

(9.) Id. [sections]1132(e)(1).

(10.) Id. [sections]1132(a)(1)(B).

(11.) Id. [sections]1144(a).

(12.) California Div. of Labor Standards Enforcement v. Dillingham Const., N.A., 117 S. Ct. 832 (19971.

(13.) 29 U.S.C. [sections]1144(b)(2)(A).

(14.) Metropolitan Life Ins. Co. v. Massachusetts, 105 S. Ct. 2380 (1985).

(15.) 29 U.S.C. [sections]1144(b)(2)(B).

(16.) Id [subsections]1002, 1003.

(17.) Flacche v. Sun Life Assurance Co. of Can. (U.S), 958 F.2d 730 (6th Cir. 1992).

(18.) 29 U.S.C. [sections]1102(a)(1).

(19.) Anderson v. Teledyne Indus., Inc., 798 F.Supp. 1309 (N.D. Ohio 1992); Rhoton v. Central States, S.E. & S.W. Areas Pension Fund, 717 F.2d 988 (6th Cir. 1983).

(20.) Moore v. Reynolds Metals Co. Retirement Pro gram for Salaried Employees, 563 F.Supp. 1372 (S.D. Ohio 1983), rev'd, 740 F.2d 454 (6th Cir.1984), cert. denied, 105 S. Ct. 786 (1985).

(21.) Firestone Tire & Rubber Co. v. Bruch, 109 S. Ct. 948 (1989).

(22.) See Amato v. Bernard, 618 F.2d 559 (9th Cir. 1980); Miller v. Metropolitan Life Ins. Co., 925 F.2d 979,986 (6th Cir.1991).

(23.) Lewandowski v. Occidental Chem., 986 F.2d 1006 (6th Cir.1993).

(24.) 29 U.S.C. [sections]1132(a).

(25.) Grimes v. Dayton-Walther Corp., 680 F. Supp. 1110 (S.D. Ohio 1987); Varhola v. Doe, 820 F.2d 809 (6th Cir. 1987), aff'd in part, vacated in part, 914 F.2d 259 (6th Cir.1990); Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 103 S. Ct. 2856, 2866 (1983).

(26.) Jett v. Blue Cross & Blue Shield of Ala., Inc., 890 F.2d 1137 (11th Cir. 1990).

(27.) Adams v. Avondale Indus., Inc., 721 F.Supp. 1291 (S.D. Ohio 1989), aff'd in part, rev'd in part, 905 F.2d 943 (6th Cir. 1990), cert. denied, 111 S. Ct. 517 (1990); Garavuso v. Shoe Corps. of Am. Indus., Inc., 709 F.Supp. 1423 (S.D. Ohio 1989), aff'd, 892 F.2d 79 (6th Cir. 1989); Firestone, 109 S. Ct. 948.

(28.) Brown v. Blue Cross & Blue Shield of Ala., 898 F.2d 1556 (11th Cir. 1990), cert. denied, 111 S. Ct. 712 (1991); Anderson v. Great W. Life Assurance Co., 942 F.2d 392 (6th Cir. 1991), on remand, 777 F.Supp.1374 (E.D. Mich 1991).

(29.) Sandoval v. Aetna Life & Cas. Ins. Co., 967 F.2d 377, 381 (10th Cir. 1992); Oldenberger v. Central State S.E. & S.W. Areas Teamster Pension Fund, 934 F.2d 171 (8th Cir. 1991); Perry v. Simplicity Eng'g, 900 F.2d 963 (6th Cir. 1990).

(30.) Donatelli v. Home Ins. Co., 992 F.2d 763 (8th Cir. 1993); Luby v. Teamster Health, Welfare & Pension Trust Funds, 944 F.2d 1176 (3d Cir. 1991).

(31.) 29 U.S.C. [sections]1132(a)(1)(B).

(32.) Id. [sections]1132(a)(3).

(33.) 473 U.S. 134 (1985).

(34.) See, e.g., Lee v. Burkhart, 991 F.2d 1004, 1011 (2d Cir. 1993); Kuhl v. Lincoln Nat'l Health Plan, Inc., 999 F.2d 298 (8th Cir. 1993), cert. denied, 114 S. Ct.694 (1994); Harsch v. Eisenberg, 956 F.2d 651, 655-61 (7th Cir.), cert. denied, 113 S. Ct. 61 (1992); McRae v. Seafarers' Welfare Plan, 920 F.2d 819,821 (11th Cir.), reh'g denied, 931 F.2d 901 (11th Cir.) (en bane), and rev'd in part, vacated in part per curiam, 933 F.2d 1021 (11th Cir. 1991); Drinkwater . Metropolitan Life Ins. Co., 846 F.2d 821, 824 (1st Cir.), cert. denied, 488 U.S. 909 (1988); Sommers Drug Stores Co. Employee Profit Sharing trust v. Corrigan Enters., Inc., 793 F.2d 1456, 1462-65 (5th Cir. 1986), cert. denied, 479 U.S. 1034, 1089 (1987); Sokol v. Bernstein, 803 F.2d 532, 534-38 (9th Cir. 1986); Powell v. Chesapeake & Potomac Tel. Co., 780 F.2d 419, 424 (4th Cir. 1985), cert. denied, 476 U.S. 1170 (1986). For the dissenting view, see Warren v. Society Nat'l Bank, 905 F.2d 975 (6th Cir. 1990), cert. denied, 500 U.S. 952 (1991).

(35.) 113 S. Ct. 2063 (1993).

(36.) 29 U.S.C. [sections]1132(g).

(37.) Laird v. Metropolitan Life Ins. Co., 800 F. Supp. 1506 (N.D. Ohio 1992).

(38.) Winpisinger v.Aurora Corp., 469 F. Supp. 782 (N.D. Ohio 1979).

(39.) Eaves v. Penn, 587 F.2d 453, 465 (10th Cir. 1978).

(40.) Drennan v. General Motors Corp., 977 F.2d 246 (6th Cir. 1992), cert. denied, 113 S. Ct. 2416 (1993).

(41.) Stewart v. KHD Deutz of Am. Corp., 75 F.3d 1522 (11th Cir. 1996), cert. denied, 117 S. Ct. 300 (1996); Golden v. Kelsey-Hayes Co., 73 F.3d 648 (6th Cir. 1996), cert. denied, 117 S. Ct. 49 (1996); Sullivan v. LTV Aerospace & Defense Co., 82 F.3d 125 1 (2d Cir. 1996).

(42.) Metropolitan Life Ins. Co. v. Taylor, 107 S. Ct. 1542 (1987).

(43.) Dukes v. U.S. Healthcare, Inc., 57 F.3d 350 (3d Cir. 1995), cert. denied, 116 S. Ct. 564 (1995); Pacificare of Okla. v. Burrage, 59 F.3d 151 (10th Cir. 1995); Visconti v. U.S. Health Care, 857 F. Supp. 1097 (E.D. Pa. 1994).
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Author:Perez, Robert Armand
Date:May 1, 1997
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