Last week, the U.S. Department of Labor (DOL) entered into a settlement agreement with EmblemHealth Inc. (Emblem), a New York-based health insurer and third-party administrator (TPA) to health plans governed by ERISA, resolving DOL's claims that Emblem breached its fiduciary duties and otherwise violated ERISA by engaging in "cross-plan offsetting." Cross-plan offsetting refers to the practice by which a health plan insurer or TPA recoups alleged overpayments to a healthcare provider under one plan by reducing subsequent payments owed to the same provider or plan participants under a different plan. This payment practice has been a focus of DOL enforcement efforts in recent years, with DOL challenging the practice in its amicus curiae brief in the case of Peterson v. UnitedHealth Group, Inc., 913 F.3d 769 (8th Cir, 2019). In that case, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court's grant of summary judgment in favor of out-of-network providers who sued alleging the payment practice violated ERISA. The Eighth Circuit agreed with the lower court that the plan administrator's interpretation of the plan to authorize cross-plan offsetting was not reasonable and stated that "cross-plan offsetting is in some tension with the requirements of ERISA," without definitively ruling on all the plaintiffs' ERISA claims. DOL argued, in part, that cross-plan offsetting violates ERISA by improperly denying participants and beneficiaries benefits due under their plans and exposing them to balance billing from out-of-network providers when their benefit payments from plans are withheld to recoup overpayments to the providers on prior claims related to other plans. None of the briefs in Peterson contained examples of instances of the alleged balance billing.
The Emblem settlement contains several key provisions:
- Emblem must refrain from cross-plan offsetting prospectively and amend plan documents, policies, procedures, and practices involving ERISA-covered plans to "eliminate references to the practice of cross-plan offsetting."
- By January 1, 2024, Emblem must pay current and former participants and beneficiaries or their estates any reductions in reimbursement amounts they sustained during the period July 16, 2015, to the present due to cross-plan offsetting.
- Also by January 1, 2024, Emblem must send a prescribed notice to affected participants and beneficiaries or their estates if Emblem withheld payment to a provider on their claims during the period July 16, 2015, to the present due to cross-plan offsetting. The notice advises recipients to contact Emblem and provide information and documentation to facilitate reimbursements that may be due to them from Emblem under the terms of the settlement on account of balance billing that resulted from Emblem's cross-plan offsetting practices. The notice also requests information to enable Emblem to help resolve ongoing collection activity resulting from these payment practices. The notice must be sent via first-class mail and email and be posted on Emblem's website. The settlement gives aggrieved parties 365 days to contact Emblem.
- Emblem agrees to make retrospective payments to aggrieved parties in the amount of out-of-pocket expenses, including fees, penalties, and interest, the latter paid due to balance billing following cross-plan offsetting, and to undertake reasonable efforts to resolve any outstanding provider bills or collection activities resulting from its cross-plan offsetting practices. Emblem must also send to parties receiving payment under the settlement a notice advising of Emblem's agreement to work with credit agencies to resolve any resulting adverse credit reporting.
- Emblem must provide on-going reporting to DOL on all responses to its notices and payments made and other activities under the settlement.
- Emblem executed a consent judgment, which DOL may seek to enforce in court in the event DOL deems Emblem to have breached a material term of the settlement and the parties cannot resolve informally their disagreement over compliance with the settlement terms.
DOL and plaintiffs' counsel representing participants and beneficiaries who have brought ERISA class action lawsuits related to the practice of cross-plan offsetting have yet to put forth in public complaints or otherwise data indicating that participants and beneficiaries have, in fact, suffered financial harm from the practice of cross-plan offsetting, i.e., whether out-of-network providers are balance billing their patients when a payor or TPA recoups a prior overpayment using this practice. The outreach to participants and beneficiaries and the reporting required under this settlement with Emblem may answer this question once and for all, and that answer will impact how attractive these cases will be for both DOL and the plaintiffs' bar.
Ninth Circuit Holds That, Even Though DOL's Enforcement Case Was "Shoddy," It Was Not So Bad as to Warrant Equal Access to Justice Act Fees
Under the Equal Access to Justice Act (EAJA), when the federal government takes a case to trial even though its litigation position is not "substantially justified," it may be ordered to cover the defendant's attorneys' fees and costs. 28 U.S.C. § 2412. Last month, in Su v. Bowers, No. 22-15378, --- F.4th ----, 2023 WL 7009599 (9th Cir. Oct. 25, 2023), the Ninth Circuit decided that DOL just barely escaped this standard in connection with its ERISA enforcement action against Brian Bowers and Dexter Kubota, the owners of Bowers + Kubota Consulting, Inc. (B+K), an engineering and architectural firm. See generally Bowers, 2023 WL 7009599.
In 2018, after a multi-year investigation, DOL brought suit against Bowers and Kubota, alleging that when they sold their company to B+K's employee stock ownership plan (ESOP) for $40 million, they had done so at what DOL claimed to be an inflated value. DOL's complaint asserted that Bowers and Kubota breached their fiduciary duties and engaged in self-dealing by inducing the ESOP to pay above-market value for the shares of B+K in violation of ERISA. When trial began only one question mattered: whether B+K was sold for more than its fair market value. The government's case therefore hinged on its valuation expert, who opined that B+K was significantly overvalued based on a supposedly unsupportable projection of the company's earnings.
The district court, however, rejected the expert's opinion as unreliable. The district court concluded that the expert had committed several errors that caused him to "significantly and unreasonably undervalue B+K." The court also found that the expert could have avoided his errors had he (or DOL's lawyers) interviewed B+K's management about the company's finances. "Without a reliable expert to show the B+K was sold for more than its fair market value, the government's case crumbled," and DOL lost after a five-day bench trial. Id. at *3.
Following the trial, the district court denied a request from Bowers and Kubota for attorneys' fees and nontaxable costs under EAJA, finding that DOL's litigation position was "substantially justified." Id. at *4. Under the statute, the government's position "need not be correct, but it must be justified to a degree that would satisfy a reasonable person" – an objective standard assessed at the time of trial, not in hindsight. Id. (cleaned up).
In a split 2-1 decision, Ninth Circuit Judges Carlos Bea and Kenneth Lee found that DOL's case against Bowers and Kubota was "time-consuming," "expensive," "shoddy," "weak on evidence," and "had many flaws" – but held that the district court did not abuse its discretion in denying fees under EAJA. Id. at *2, 6. The panel rejected DOL's argument that its litigation position was substantially justified based on red flags that had suggested "where there is smoke, there must be fire." Id. at *4. But the panel agreed that the government was substantially justified in relying on its expert's flawed opinion – even though DOL "knew or should have known" about his errors, given that defense experts had pointed out the mistakes during discovery. Id. at *5. Yet, because the government "did not know heading into trial that the district court would reject [its expert's] entire opinion, its litigation position "was not without a reasonable basis." Id. at *6.
The panel declared that "EAJA is not a toothless tool when combatting governmental overreach," and "recognize[d] that this [case] [wa]s a close call," going so far as to concede that "had the district court awarded fees here, it might not have been an abuse of discretion to do so." Id. at 6. But, finding itself constrained by a "deferential standard of review," the panel could not say "that the district court abused its discretion in finding that the government's position was substantially justified at the time of trial." Id. The panel did hold, however, that the district court abused its discretion in reducing the award of taxable costs from roughly $73,000 to $42,000 and remanded the case back to the district court for reconsideration of that issue. Id. at *7.
Judge Daniel Collins agreed that the court should vacate the order reducing the cost award, but otherwise dissented and would have awarded attorneys' fees against DOL. He wrote that even though the majority did not dispute that DOL's case against Bowers and Kubota "was unsupported by substantial evidence," it nonetheless (incorrectly) upheld the district court's denial of attorneys' fees. The majority did so, he wrote, based on a "novel standard [that] is inconsistent with the statute" – i.e., "that the [g]overnment reasonably failed to recognize, in advance of trial, just how weak its case was." Id. To Judge Collins, the case was an "easy" one when it was obvious that B+K was worth more than the $40 million sale price and when there were "no special circumstances that would suggest that this is the 'decidedly unusual case' in which the [g]overnment's position is substantially justified despite being unsupported by substantial evidence." Id. at *8, 10-12.
Arising out of a 2012 ESOP transaction that gave rise to DOL's lawsuit filed in 2018, the B+K litigation is emblematic of DOL's unyielding enforcement position concerning what it views to be "adequate consideration" for sales or purchases of employer stock by ESOPs. DOL issued a proposed regulation in 1988 interpreting "adequate consideration," and has only recently announced that it will take action to finalize the rule and provide guidance by year-end. In the meantime, the Bowers and Kubota saga continues.
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