The Sixth Circuit, in a 2-1 opinion, issues an important remedies ruling under the Employee Retirement Income Security Act (ERISA). The majority holds that a disability plan participant who was wrongfully denied benefits was entitled to both recovery of the benefit and disgorgement of the plan's profits from the delay of payment. The disgorgement remedy - affirmed by the panel majority - was $3.8 million, based on the finding that the plan treated the withheld benefit as general equity and earned 11 to 39% annually on the money.
Rochow v. Life Ins. Co. of N. Am., No. 12-2074 (6th Cir. Dec. 6, 2013): Twelve years ago, the participant Rochow (now deceased, represented by his estate) "began to experience short term memory loss, occasional chills, sporadic sweating, and stress at work." He could no longer carry out his duties as president, was demoted to sales, and discovered some seven months later that he was suffering from a rare brain infection, HSV-Encephalitis. He applied for long-term disability (LTD) benefits from the plan (LINA), but was denied the benefit after three separate appeals to the plan.
Rochow sued LINA under ERISA § 502(a)(1)(B) to recover full benefits due to the LINA's violation of the plan terms, and ERISA § 502(a)(3) for breach of fiduciary duty. Eventually, the district court and Sixth Circuit held that the denial of the benefit was arbitrary and capricious, was not the result of a deliberate, principled reasoning process, and did not appear to have been made "'solely in the interest of the participants and beneficiaries and [ ] for the exclusive purpose of [ ] providing benefits to participants and their beneficiaries' as required by ERISA. 29 U.S.C. § 1104(A)(1)."
On remand, the district court awarded Rochow his lost benefit and attorney's fee (neither of which was challenged here). Yet the judge also awarded an eye-popping $3,797,867.92 as disgorgement of profits based on the fiduciary duty claim, based on unjust enrichment. This was based in part on plaintiff's expert witness testimony (by Dr. David C. Croson): "In calculating LINA's 'Return on (Average) Equity' ('ROE'), Dr. Croson determined LINA used Rochow's benefits to earn between 11 percent and 39 percent annually and, therefore, made approximately $2.8 million by retaining Rochow's benefits." LINA's expert, Timothy Holzli, calculated a $32,732 figure, but the judge rejected this "based upon its factual finding that the subject money was not placed in a separate investment account, but rather was available for LINA to use for any business purpose."
LINA appealed both the availability of the equitable remedy of disgorgement and the district court's calculation. The panel majority affirms the decision in its entirety. It rejects LINA's fundamental argument that the U.S. Supreme Court's decision Variety Corp. v. Howe, 516 U.S. 489, 512 (1996), bars recovery under both sections 502(a)(1)(B) and (3). (LINA also cited Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609 (6th Cir. 1998).) The panel majority holds that both remedial sections can apply, though, where the participant suffered two distinct injuries - here, the delayed benefit plus the inequitable result that LINA made money off of Rochow's benefit during the many years that the parties litigated this case.
"Nothing in ERISA itself or Variety limits this Court to allowing remedies under § 503(a)(3) that focus on the plaintiff's injuries. The language of § 503(a)(3) allows participants 'to obtain other appropriate equitable relief (I) to redress [violations of any provision of this subchapter or the terms of the plan].' 29 U.S.C. § 502(a)(3). Although one meaning of redress is "to set right," it can also mean 'to exact reparation for: avenge.' MERRIAM WEBSTER DICTIONARY 1904 (3d ed. 2002). Black's Law Dictionary defines it as 'relief' or 'remedy' generally and gives it no restorative tinge at all. BLACK'S LAW DICTIONARY 1392 (9th ed. 2009). In Variety, the Supreme Court did not discuss ERISA as a statute solely focused on making a claimant whole. Rather, Variety noted in support of its argument that allowing individual recovery under § 502(a)(3) was consistent with the purposes of ERISA because in some instances, like the Variety case itself, other remedies may not be available. Variety, 516 U.S. at 515."
The panel majority rejects the argument that the inclusion of equitable relief in denial-of-benefit cases will unduly complicate proceedings. The court observes that while an efficient procedure for recovery of benefits is a goal of ERISA, the statute also has a goal of ensuring that plan fiduciaries meet their duty of loyalty:
"Although discovery may slow down litigation over benefit denials in some cases, the risk of liability and extensive discovery regarding profits or interest will act as an incentive to ensure plan administrators act in the interest of the plan participants throughout the claims process. If no remedy beyond the award of benefits were allowed, insurance companies would have the perverse incentive to deny benefits for as long as possible, risking only litigation costs in the process."
The panel majority also affirms the calculation of disgorgement. It holds - though noting a split in the circuits on this issue - that the appellate standard of review of the method of calculating the remedy is abuse-of-discretion. It also holds that the award was supported by the record:
"The district court's decision to accept Rochow's ROE metric and reject LINA's retrained investment approach rested on a pivotal factual finding. The district court found, as a factual matter, that the wrongfully withheld money was not held by LINA in a separate investment account but rather was available to LINA to use as bottom line equity for any business purpose. The district court reasoned that since the wrongfully withheld funds were available for LINA to use for any business purpose, ROE was the appropriate metric to apply to arrive at a reasonable approximation of LINA's unjust enrichment."
In dissent, Judge McKeague would hold that the make-whole award of payment of the benefit (with interest and attorney's fees) suitably compensated the participant, and that allowing addition al equitable relief under section 502(a)(3) is both a windfall and disruptive of ERISA's remedial framework. "[D]isgorgement under the circumstances of this case fundamentally alters how denied disability-benefits claims are litigated, forcing district courts to werestle with complex calculations of profits and raising the specter that any claimant who was arbitrarily and capriciously denied benefits would have a viable claim for disgorgement." [Foot note omitted.]