A huge win today for participants in pension and other employee benefit plans. The Supreme Court today issued its opinion on the perennial issue under the Employee Retirement Income Security Act (ERISA) about what weight a court should give to a summary plan description (SPD) that materially contradicts a plan instrument. It reaches the surprising conclusion – contrary to the standing law in most circuits – that an SPD is not part of an ERISA plan and hence not enforceable under ERISA § 502(b)(1)(B). But it also holds that inconsistencies between an SPD and a plan may support judicial reformation of the plan under ERISA § 502(a)(3) and even monetary remedies in the form of “surcharge.” This huge blessing for participants whose cases, up to this point, were often stalled by lower courts for want of “appropriate equitable relief.”
CIGNA Corp. v. Amara, No. 08-804 (U.S. S. Ct. May 16, 2011): A unanimous Supreme Court (with Justice Sotomayor recused) finds that ERISA § 502(a)(1)(B) provides no relief to a plan participant who is seeking to enforce the language of an SPD that is inconsistent with a plan instrument. Dividing 6-2, the Court holds that such relief might be obtained in the form of plan reformation under ERISA § 502(a)(3).
In 1997, CIGN announced that it was switching its 25,000 pension plan participants from a defined-benefit plan (a form of annuity) to a “cash balance” plan (creating a putative retirement “account” for each participant). Part of the conversion process was that CIGNA would make an initial “deposit” into each account equal to the participants’ already-earned benefit under the phased-out plan.
Plan participants challenged the conversion in federal court in a class action, and the district court held that CIGNA’s announcement of the new plan was deliberately misleading in a number of material respects, failing to mention (among other things) that the new plan eliminated an early-retirement option; that the new plan adjusted CIGNA’s initial deposit downward because participants’ survivors would receive the new plan’s benefits if they died before retirement; and that any risk of falling interest rates would be shouldered by the participants (whose accounts would grow more slowly). The district court held that the notice to the participants created a false impression that their benefits were not being reduced.
The district court found that the plan thereby violated ERISA §204(h) (requiring written notice of an adverse change in a plan) and §§102(a) and 104(b) (requiring a plan administrator to provide beneficiaries with SPDs and summaries of material modifications). To remedy the violations, the district court relied on ERISA §502(a)(1)(B), which states that a “civil action may be brought” by a plan “participant or beneficiary . . . to recover benefits due to him under the terms of his plan.” The court then reformed the plan to more nearly approximate what participants would have earned under the old plan. The district court held that all participants were presumptively entitled to this relief on the ground that they suffered “likely harm” from the publication of misinformation in the SPD. The Second Circuit affirmed in a summary order.
The original question presented asked “Whether a showing of ‘likely harm’ is sufficient to entitle participants in or beneficiaries of an ERISA plan to recover benefits based on an alleged inconsistency between the explanation of benefits in the Summary Plan Description or similar disclosure and the terms of the plan itself.”
But the Court unanimously decides a threshhold issue instead – whether ERISA § 502(a)(1)(B) allows such relief. This section provides a cause of action to participants and beneficiaries to enforce a plan. But here, of course, the participants were not seeking to enforce the plan itself – which they contended was amended to their dissatisfaction – but a prior version of the plan that was more favorable.
Justice Breyer, writing for the Court, holds that this section is not the correct vehicle for reformation of the plan:
“Where does §502(a)(1)(B) grant a court the power to change the terms of the plan as they previously existed? The statutory language speaks of “enforc[ing]” the “terms of the plan,” not of changing them. 29 U. S. C. §1132(a)(l)(B) (emphasis added). The provision allows a court to look outside the plan’s written language in deciding what those terms are, i.e., what the language means. See UNUM Life Ins. Co. of America v. Ward, 526 U. S. 358, 377-379 (1999) (permitting the insurance terms of an ERISA-governed plan to be interpreted in light of state insurance rules). But we have found nothing suggesting that the provision authorizes a court to alter those terms, at least not in present circumstances, where that change, akin to the reform of a contract, seems less like the simple enforcement of a contract as written and morelike an equitable remedy.”
And significantly, against a wide swath of court of appeals’ case law that holding the SPD itself may contain terms of a plan that may be enforced under this section, even if inconsistent with the plan instrument, the Court today says “no.” It analyzes the relevant sections of ERIS and finds that such a description of a plan, produced by a plan administrator, cannot create rights that contradict the undertaking of a plan sponsor under a plan instrument:
“[We conclude that the summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of §502(a)(1)(B). We also conclude that the District Court could not find authority in that section to reform CIGNA’s plan as written.”
Thus, the district court judgment would have to be reversed on this ground. But six justices go on to hold that reformation might constitute “appropriate equitable relief” allowed under §502(a)(3), as that language had been construed in Mertens v. Hewitt Associates, 508 U. S. 248 (1993).
“The case before us concerns a suit by a beneficiary against a plan fiduciary (whom ERISA typically treats asa trustee) about the terms of a plan (which ERISA typically treats as a trust). . . . It is the kind of lawsuit that, before the merger of law and equity, respondents could have brought only in a court of equity, not a court of law.”
In addition to the district court injunctions against the plan, which were clearly equitable relief, the Court majority holds that other relief ordered by the district court also fell into the category of equitable remedies:
Reformation of the plan – “what the District Court did here may be regarded as the reformation of the terms of the plan, in order to remedy the false or misleading information CIGNA provided. The power to reform contracts (as contrasted with the power to enforce contracts as written) is a traditional power of an equity court, not a court of law, and was used to prevent fraud.”
Equitable estoppel – “[T]he District Court’s remedy essentially held CIGNA to what it had promised, namely, that the new plan would not take from its employees benefits they had already accrued. This aspect of the remedy resembles estoppel, a traditional equitable remedy. See, e.g., E. Merwin, Principles of Equity and Equity Pleading §910 (H. Merwin ed. 1895); 3 Pomeroy §804. Equitable estoppel ‘operates to place the person entitled to its benefit in the same position he would have been in had the representations been true.'”
Surcharge – “[T]he District Court injunctions require the plan administrator to pay to already retired beneficiaries money owed them under the plan as reformed. But the fact that this relief takes the form of a money payment does not remove it from the category of traditionally equitable relief. Equity courts possessed the power to provide relief in the form of monetary ‘compensation’ for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment. . . . Indeed, prior to the merger of law and equity this kind of monetary remedy against a trustee, sometimes called a ‘surcharge,’ was ‘exclusively equitable.'”
As to this final remedy, the majority even holds that a participant need not show “detrimental reliance” on the SPD misstatement to obtain relief:
“Nor did equity courts insist upon a showing of detrimental reliance in cases where they ordered ‘surcharge.’ Rather, they simply ordered a trust or beneficiary made whole following a trustee’s breach of trust. In such instances equity courts would ‘mold the relief to protect the rights of the beneficiary according to the situation involved.’ Bogert §861, at 4. This flexible approach belies a strict requirement of ‘detrimental reliance.'”
* * * *
“We believe that, to obtain relief by surcharge for violations of §§ 102(a) and 104(b), a plan participant or beneficiary must show that the violation injured him or her. But to do so, he or she need only show harm and causation. Although it is not always necessary to meet the more rigorous standard implicit in the words ‘detrimental reliance,’ actual harm must be shown.”
Justices Scaliand Thomas concur only in the part of the opinion that the SPD is not a plan instrument and not enforceable under ERISA § 502(a)(1)(B). The rest, the separate opinion declares (against a six-justice majority), is dicta:
“If the District Court dismisses the case based on an incorrect reading of Mertens, the Second Circuit can correct its error, and if the Second Circuit does not do so this Court can grant certiorari. The Court’s discussion of the relief available under §502(a)(3) and Mertens is purely dicta, binding upon neither us nor the District Court.”
Bottom-line, this decision is huge victory for participants and the most pro-employee opinion in recent memory from our High Court. It frees participants from the fiction of having to establish that an SPD constitutes a “plan” document, and at the same time announces a monetary “surcharge” remedy tailored to such violations that the courts of appeals had heretofore had no reason to develop. It also helps revive the (largely moribund) remedy of equitable estoppel in this arena. Simply excellent day for justice!