Supreme Court's newest ERISA decision. The Supreme Court's recent decision in CIGNA Corporation v. Amara, 563 U.S. ____ (5/16/11), may revolutionize the way that employee benefit plans are drafted and the ability of plan participants to overturn provisions that they object to; or it may turn out to be the articulation of theories that have no practical impact. On the broadest interpretation, it gives courts wide-ranging authority to "reform" plan documents to conform to the expectations fostered by an employer's statements about the plan's merits. On the narrowest, it rejects one possible basis for reformation and proffers obiter dicta that might serve as an alternative, but very difficult, way to reach the same result.

The case arose out of CIGNA's conversion of its traditional defined benefit pension plan into a cash balance plan, far from a unique event. The lawsuit brought by a group of plan participants who objected to the conversion was likewise far from unique. A number of legal actions questioned the legality of cash balance conversions on a variety of grounds. What is unique is that this is virtually the only case in which the objectors have (so far) been successful. Their line of argument could probably have been raised against many other conversions but was either not presented or failed to survive the scrutiny of a district court.

CIGNA announced in 1997 that it was going to revise its pension plan. Details were yet to be worked out, so the company gave the required legal notice under ERISA § 204(h), freezing benefits as of the end of the year. Employees were told that the revised plan, when adopted, would be effective retroactively to January 1, 1998.

The new plan design was rolled out about 11 months later, accompanied by a summary that boasted about its virtues and, at least in the eyes of the courts that examined it later, downplayed the ways in which it might be less beneficial to participants than a continuation of its predecessor plan. Here are some major points that Justice Breyer, writing for the Court, found problematic in these disclosures:

  • The cash balance plan established a hypothetical opening account balance for each participant equal to the present value of his accrued benefit as of December 31, 1997. The calculation of this amount assumed that participants would not start receiving benefits until age 65. It also disregarded their right to retire early, if various conditions were met, and receive a benefit that was more valuable than the age 65 benefit (because it was not actuarially reduced to fully reflect the value of early commencement). CIGNA's communications to participants stated that the opening balance was the "full value" of participants' pre-1998 benefits, without specifying more specifically how that "full value" had been arrived at.
  • The calculation of the opening balance also took into account the possibility of death before benefit commencement, which under the old plan design would result in the loss of all of the benefit except a minimal annuity payable to the participant's surviving spouse. Under the new design, a prematurely deceased participant's beneficiary would receive the value of his account. Justice Breyer characterized the use of a mortality discount as tantamount to adding a form of life insurance to the plan and charging participants for it. That feature should, he declared, have been disclosed to participants so that they could judge whether their opening balances were truly the "full value" of their benefits.
  • In order to comply with ERISA's prohibition against retroactive cutbacks to early retirement benefits (ERISA § 204(g); IRC § 411(d)(6)), the amended plan provided that participants were entitled to the greater of their benefit accrued under the prior formula through December 31, 1997, or the benefit provided by their cash balance accounts. Early retirees thus would not lose the value of the "subsidy" for early benefit commencement. On the other hand, because the subsidies were quite substantial, it might be some years before the opening cash balance account plus later principal credits (amounts added each year to the hypothetical accounts, based on participants' annual compensation) and interest credits produced a benefit for an early retiree equal to his frozen pre-1998 benefit. CIGNA had told participants that they would "see the growth in [their] total retirement benefits from CIGNA every year," without noting that this statement was true only for benefits beginning at age 65, not for every participant at every possible retirement age.
  • The cash balance plan added interest to participants' account balances at a rate that could vary from 4.5% to 9% per year, depending on the yields on US Treasury obligations. Justice Breyer saw this feature as "shift[ing] the risk of a fall in interest rates from CIGNA to its employees," another detriment that ought to have been disclosed.
  • Finally, CIGNA told employees that it would not save money as a result of the conversion. That assertion took into account simultaneous improvements to other employee benefits; the cost of the pension plan, taken alone, apparently fell initially by about $10 million a year. The Court noted these facts without opining on whether they constituted another instance of inadequate disclosure.

Based on such considerations, aggravated by the company's unwillingness to provide "individual comparisons" showing how the new plan would affect participants, the district court concluded that CIGNA violated two duties when it revised the plan. One of those violations was of no help to the plaintiffs. As noted above, any amendment significantly reducing the rate of future benefit accrual under a plan must be preceded by a written notice that adequately summarizes the changes. The court held that CIGNA's notice did not adequately describe the cash balance amendments. The company had, however, frozen all benefit accruals as of the end of 1997 and had unquestionably given adequate notice of that amendment. Striking down the cash balance amendment would leave accruals frozen, and participants would be worse off than before. The district court considered whether all of the disclosures should be aggregated into a single, noncompliant § 204(h) notice (and Justice Scalia's concurrence raised that possibility, too) but ultimately dropped the idea.

The other supposed violation became the path to relief. The district court held that CIGNA had not satisfied the requirement (ERISA §§102(a) and 104(b)) that it provide summary plan descriptions and summaries of material modifications that are "written in a manner calculated to be understood by the average plan participant" and "sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan". In the judge's eyes, the violation was clear. But what could be done about it?

The solution was to declare that the plan document could be revised judicially to reflect what participants were "promised" by CIGNA's communications. As "reformed" by the court, the plan gave participants their frozen pre-1998 benefits plus benefits earned under the cash balance formula from 1998 onward. Thus there was certain to be an increased benefit each year, regardless of when a participant retired, and the opening balance became irrelevant. (The reformed plan did nothing about "the risk of a fall in interest rates." Aside from compelling CIGNA to continue its old plan indefinitely, it's hard to see how that alleged nondisclosure could be rectified.)

For authority to substitute its own plan design for CIGNA's, the district court relied on ERISA §502(a)(1)(B), which gives a plan participant the right "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." This particular holding (summarily affirmed by the 2nd Circuit, 348 Fed. Appx. 627 (2009)) the Supreme Court rejected, vacating it by an 8–0 vote (Justice Sotomayor not participating). The lower court's own rationale got the shortest of shrifts:

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. . . . 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. . . . . 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 more like an equitable remedy.

The plaintiffs probably placed greater hope in an alternative argument advanced by the Department of Labor as an amicus curiae, namely,

that the "plan" includes the disclosures that constituted the summary plan descriptions. In other words, in the view of the Solicitor General, the terms of the summaries are terms of the plan.

The Court's emphatic rejection of that theory may resonate outside this case and context. It has become a more or less settled principle in most lower federal courts that a summary plan description overrides the plan document when the two conflict, at least where participants have relied on the SPD. The Court called that position into question. After observing that the text and structure of the statute imply that plans and SPD's are distinct documents, Judge Breyer concluded:

Finally, we find it difficult to reconcile the Solicitor General's interpretation with the basic summary plan description objective: clear, simple communication. . . . To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers. Consider the difference between a will and the summary of a will or between a property deed and its summary. Consider, too, the length of Part I of this opinion [describing, with a great deal of oversimplification that will cause ERISA specialists to gnash their teeth, and then consider how much longer Part I would have to be if we had to include all the qualifications and nuances that a plan drafter might have found important and feared to omit lest they lose all legal significance. The District Court's opinions take up 109 pages of the Federal Supplement. None of this is to say that plan administrators can avoid providing complete and accurate summaries of plan terms in the manner required by ERISA and its implementing regulations. But we fear that the Solicitor General's rule might bring about complexity that would defeat the fundamental purpose of the summaries.

For these reasons taken together 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).

Whether this admonition will have any practical effect remains to be seen. At the very least, judges may now have to wrestle with justifying the view that an SPD is not just a convenience to participants but also an independent source of legal rights. On the other hand, one may argue that the Court has effectively overruled the line of cases, particularly in the Ninth and Third Circuits, that have held where the plan's summary plan description (SPD) conflicts with the plan's language, the SPD controls. See, e.g., Burstein v. Retirement Account Plan for Employees of Allegheny Health Education and Research Foundation, 334 F.3d 365 (3rd Cir. 2003).

Having dismissed the ground on which the lower court rested its decision, the Supreme Court might, as Justice Scalia urged in a separate opinion, have remanded the case without further comment. Instead, the majority went on to weigh an argument that the district court had put aside: that the reformation of the plan document might be possible as "other appropriate equitable relief" to redress an "an act or practice which violates any provision of this title" (ERISA § 502(a)(3)). Thinking the § 502(a)(1)(B) was sufficient, the district court saw no need to explore § 502(a)(3). It was also deterred by a number of Supreme Court decisions, starting with Mertens v. Hewitt Associates, 508 U.S. 248 (1993), that "have severely curtailed the kinds of relief that are available under § 502(a)(3)."

Despite the fact that, as Justice Scalia complained, the scope of § 502(a)(3)'s remedies was not part of the question certified to the Court and was briefed casually, if at all by the parties, Justice Breyer ventured to consider how the district court's reformation of the plan might fit within the subparagraph's perimeters.

The standard for the availability of § 502(a)(3) relief is one that even most lawyers find obscure: whether the proposed remedy was "typically available in equity" before the courts of law and equity were merged (a process completed in the federal courts in 1938 and earlier than that in most states). Justice Breyer saw three ways in which the district court's remedy could meet that standard:

  1. Courts of equity traditionally had the power to reform written contracts to correct "fraud or mistake," so that "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." There is not much doubt of the general proposition that courts can reform the terms of ERISA plans in some instances. That authority has been used, for example, to rectify a drafting error that would otherwise have vastly inflated some participants' benefit entitlements. Young v. Verizon's Bell Atlantic Cash Balance Plan, 615 F.3d 808 (7th Cir., 8/10/10). The question is how to apply the general proposition to the facts of a case. The Court offers no guidance on what sort of conduct rises to the level of "fraud or mistake." If it contemplates the standard applied by 19th Century courts of equity, then, as discussed below, it presents plaintiffs with a steep and rocky path to recovery.
  2. The lower court's action could also be regarded as a form of equitable estoppel, which "operates to place the person entitled to its benefit in the same position he would have been in had the representations been true." On this view, "the 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." The Court did not mention that, as noted above, ERISA has specific rules preventing the reduction or elimination of accrued benefits, with which CIGNA complied; one may wonder whether an open-ended equitable remedy is a necessary and proper add-on. (The law has since been amended to impose stricter standards, but the plaintiffs made no showing that CIGNA violated the law as in effect in 1998.)
  3. On a narrower issue, the Court considered whether the lower court could "require the plan administrator to pay to already retired beneficiaries money owed them under the plan as reformed." It likened that remedy to an equitable surcharge, which could be levied to compensate "for a loss resulting from a trustee's breach of duty, or to prevent the trustee's unjust enrichment." This portion of the opinion has significant undertones, as it suggests an expansion of fiduciary liability beyond losses suffered by the plan, to encompass consequential or incidental damages suffered by individual participants. The significance of the opinion's statements is muddied, though, by that fact that the district court did not require the "plan administrator" to pay anything to anyone. It required the plan to pay benefits, as calculated under the "reformed" plan, to retired participants who had already received "unreformed" distributions. If the court could reform the plan, it could a fortiori require benefit payments back to the effective date of the reformation. That is a straightforward benefit claim under § 502(a)(1)(B) and does not bring § 502(a)(3) into play at all.

The Court summarizes that "the types of remedies the court ordered here fall within the scope of the term 'appropriate equitable relief' in § 502(a)(3)." It proceeds to discuss the standard for determining whether participants have suffered "harm," which, it states, is a precondition for equitable relief of any kind.

CIGNA had argued in the district court that only participants who could show that they had taken action in reliance on the company's alleged misstatements and had suffered as a result ought to benefit from any remedy. Justice Breyer denied that "detrimental reliance" was the proper standard, although "actual harm must be shown." What that harm might consist of was left nebulous:

In the present case, it is not difficult to imagine how the failure to provide proper summary information, in violation of the statute, injured employees even if they did not themselves act in reliance on summary documents – which they might not themselves have seen – for they may have thought fellow employees, or informal workplace discussion, would have let them know if, say, plan changes would likely prove harmful. We doubt that Congress would have wanted to bar those employees from relief. . . .

Information-related circumstances, violations, and injuries are potentially too various in nature to insist that harm must always meet that more vigorous "detrimental harm" standard when equity imposed no such strict requirement.

Non-detrimental harm is less than an intuitive concept. Earlier cases – notably Varity Corp. v. Howe, 516 U.S. 489 (1996) – held that participants might have a remedy if their employer deliberately misled them about plan provisions in a way that caused them to act against their own best interests. Amara can be read as setting a much lower threshold for relief.

In the situation hypothesized by Justice Breyer, the participant has not seen the misleading claims about the benefits of the new plan design and is "harmed," it seems, solely because he is unaware that what he does not know about may be false.

Pushed to the hilt, some of the language in Amara could convert judges into reviewers of whether plans provide all of the benefits implied by employers' statements about them and are free from any undisclosed defects. Certainly, the case opens many new lines of argument for plaintiffs and makes careful vetting of communications with participants more important than ever before.

Nonetheless, little may come of Amara after all the arguments are done. In the courts of equity, "fraud" was a term of complex and variegated meaning, but in no sense a low hurdle for plaintiffs to clear. Describing the kind of fraud nearest to what is alleged in Amara, one authority says:

One of the largest classes of cases, in which courts of equity are accustomed to grant relief, is where there has been a misrepresentation, or suggestio falsi. To justify, however, an interposition in such cases, it is not only necessary to establish the fact of misrepresentation; but that it is in a matter of substance, or important to the interests of the other party, and that it actually does mislead him. For, if the misrepresentation was of a trifling or immaterial thing, or if the other party did not trust to it, or was not misled by it; or if it was vague and inconclusive in its own nature; or if it was upon a matter of opinion or fact, equally open to the inquiries of both parties, and in regard to which neither could be presumed to trust the other; in these and the like cases there is no reason for a court of equity to interfere to grant relief upon the ground of fraud. [Taylor, Commentaries on Equity Jurisprudence, Founded on Story, §139 (1875) [citations omitted]]

"Fraud" seems, then, to be a far more robust standard, and harder to prove – particularly in a class action – than one might think from reading Justice Breyer's opinion. The remand of Amara will give us the first, but surely not the final, look at how the courts apply this ancient concept in the 21st Century.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.