Fourth Circuit Rejects Surcharge as Equitable Remedy Under ERISA

In a 2-1 decision, the U.S. Court of Appeals for the Fourth Circuit issued a precedential decision last week holding that the make-whole monetary remedy of surcharge is not a form of equitable relief available under ERISA. Rose v. PSA Airlines, Inc., No. 21-2207 (Sept. 11, 2023, 4th Cir.). However, the court held that the plaintiff could seek to recover money on her ERISA section 502(a)(3) claim under an unjust enrichment theory. The decision is a must-read to understand the law governing ERISA equitable remedies in the Fourth Circuit.

The case involved a 26-year-old beneficiary of the self-funded PSA Airlines Group Health Plan (the Plan), who sought benefits coverage for a heart transplant. The Plan initially denied a pre-authorization request for benefits on the basis that the treatment was experimental and then on the grounds that the beneficiary did not meet certain alcohol-abuse criteria, which the court noted were not actually part of the Plan. The beneficiary then sought an expedited external review of the claim denial. The Plan failed to complete the review within 72 hours as required by governing regulations and the beneficiary died a little over a week after submitting the external review request. The external review later overturned the Plan's initial coverage denial. 

The mother of the beneficiary filed a "wrongful denial of benefits" claim seeking monetary relief on behalf of his estate, but the district and appellate courts both determined the claim was not viable under ERISA section 502(a)(1)(B) since the relief sought was not for benefits under the Plan, but the monetary cost of the denied benefit. The two courts differed, however, on their review of the plaintiff's alternative claim alleging a fiduciary breach under ERISA section 502(a)(3). Whereas the district court dismissed that claim, finding the requested monetary relief was not a proper equitable remedy, the Fourth Circuit reviewing the matter de novo reversed that dismissal and remanded the claim back to the district court for further proceedings. To reach its decision, the Fourth Circuit went to great lengths to analyze the law governing equitable remedies under ERISA.

The Fourth Circuit focused on two decades of Supreme Court precedent interpreting ERISA and addressing what relief counts as "equitable," beginning with Mertens v. Hewitt Assocs., 508 U.S. 248 (1993), as well as numerous learned treatises devoted to the historical divide between courts of law and equity and the remedies that were available in those courts. Citing Mertens, the court stated that the equitable relief available under ERISA section 502(a)(3) includes only the kinds of relief that were "typically available in equity," which it held consisted of only those remedies available in "concurrent-jurisdiction" cases over which the courts of law and equity shared jurisdiction in the days of the divided bench. With respect to equitable monetary relief available under ERISA, the court stated: 

A plaintiff can recover money under § 502(a)(3) only if a court of equity could have awarded it in a concurrent-jurisdiction case, and a court of equity could award money when a plaintiff pointed to specific funds that he rightfully owned but that the defendant possessed as a result of unjust enrichment. See Montanile, 577 U.S. at 142–43.

Affirming the district court's dismissal of the surcharge remedy, the appellate court remanded the question of whether the plaintiff "plausibly alleged facts that would support relief 'typically' available in equity." On remand, the district court must now examine whether any of the defendants, which included PSA Airlines, Inc., and the Plan's third-party administrator, UMR, Inc., were "unjustly enriched by interfering with [the beneficiary's] rights and whether "the fruits of that unjust enrichment remain in the defendant's possession or can be traced to other assets."

Significantly, in rejecting the surcharge remedy, the Fourth Circuit broke with its prior precedent in McCravy v. Met. Life Ins. Co., 690 F.3d 176 (4th Cir. 2012), which allowed make-whole relief under section 502(a)(3). In the current decision, the circuit court stated that the Supreme Court never intended to include the trust-law remedy of surcharge, which it asserted was only available in cases falling within the exclusive jurisdiction of equity courts, within the umbrella of remedies "typically available in equity." The court acknowledged that some circuit cases that followed CIGNA Corp. v. Amara, 563 U.S. 421 (2011), indicated that surcharge was an available ERISA remedy, but, according to the court, those decisions did not fully consider the effect of the high court's most recent discussion of equitable remedies in Montanile v. Bd. of Trs., 577 U.S. 136 (2016). "Courts cannot award [the plaintiff] relief that amounts to personal liability paid from the defendant's general assets to make the plaintiff whole."  

While the Fourth Circuit had recognized surcharge as a form of equitable relief following Amara, it could no longer do so after Montanile. According to the circuit court, Amara's discussion of surcharge was dicta and Montanile "revived Mertens and Great-West" by restricting "monetary relief under § 502(a)(3) only if such relief was 'typically available in equity.'" In sum, the Fourth Circuit concluded that "equitable courts could sometimes award monetary restitution for unjust enrichment, but they could not award the broad, personal, and compensatory relief." 

The dissent was "unconvinced" with the majority's analysis of Amara and Montanile and argued that the circuit's prior McCravy precedent was correct and should be followed.

The majority decision appears to foreclose, in the Fourth Circuit, ERISA claims to recover make-whole, monetary relief under section 502(a)(3) and limits monetary relief to unjust enrichment claims to those that can "trac[e] those unjust gains to 'specifically identified funds that remain in the defendant's possession or against traceable items that the defendant purchased with the funds.'" Montanile, 577 U.S. at 144–45. The court's overturning of its own precedent and the panel split could foreshadow a petition for rehearing en banc and a petition to the Supreme Court would not be surprising in light of the Fourth Circuit's rejection of surcharge as an available remedy under ERISA § 502(a)(3).

Industry Trade Associations Support Rehearing in Ninth Circuit Appeal of Prohibited-Transaction Case Involving Renegotiation of Service Provider Contracts

Last week, several employer trade associations filed amicus briefs in the Ninth Circuit, urging the court to rehear en banc a three-judge panel's August 4, 2023, decision in Bugielski v. AT&T Services, Inc., 76 F.4th 894 (9th Cir. 2023). In that case, a putative class action involving 245,000 AT&T 401(k) plan participants, the named plaintiffs alleged that the administrator of the plan, AT&T Services, Inc., and the committee responsible for some of the plan's investment-related duties, the AT&T Benefit Plan Investment Committee (collectively, AT&T) violated ERISA when they amended existing recordkeeping contracts to add brokerage and investment advisory services without adequately considering the additional compensation recordkeeper Fidelity Workplace Services (Fidelity) would receive as a result. The plaintiffs alleged, in part, that AT&T's failure to consider this "significant" compensation rendered its contract with Fidelity a "prohibited transaction" under ERISA § 406.

The district court entered summary judgment in favor of AT&T. On de novo review, the Ninth Circuit panel reversed. The panel cited ERISA § 406(a)(1)(C), which provides that a fiduciary "shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect ... furnishing of goods, services, or facilities between the plan and a party in interest." And it explained that ERISA § 3(14)(B) defines a "party in interest" to include "a person providing services to such plan." According to the panel, the "threshold question" was, therefore, simply "whether AT&T, by amending its contract with Fidelity to incorporate the [additional] services ... 'cause[d] the plan to engage in a transaction' that constituted a 'furnishing of goods, services, or facilities between the plan and a party in interest.'" 

The panel said that the plain language of ERISA required that it answer the question with a "yes." According to the panel, Fidelity was a "party in interest" because it had been AT&T's recordkeeper for almost two decades and "provid[ed] services to" the plan in that capacity. "Additionally, no one disputes that the transaction (the amendment of the contract between AT&T and Fidelity) constituted a 'furnishing of ... services.'" Thus, the panel held, "[u]nder the plain and unambiguous statutory text, the contract amendment was a prohibited transaction under § 406(a)(1)(C)." The district court was instructed to consider whether AT&T met the requirements for an exemption, under ERISA § 408, for arrangements that are "reasonable" and supported by fair compensation. 

In reaching its decision, the panel parted ways with the Third Circuit's ruling in Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2019), which established a requirement that a plaintiff plead "factual allegations that support an element of intent to benefit a party in interest' to state a prohibited-transaction claim." 47 F.4th at 336, 338 (emphasis added). According to the Ninth Circuit panel, Sweda did not "follow the statutory text" and instead created "an intent requirement that the statute does not demand." 

The panel also found unpersuasive the Seventh Circuit's decision in Albert v. Oshkosh, 47 F.4th 570 (7th Cir. 2022), which, like Sweda, rejected a literal reading of the statute. Citing Sweda, the Seventh Circuit found that courts "have declined to read ERISA that way [i.e., literally] because it would prohibit fiduciaries from paying third parties to perform essential services in support of a plan." 47 F.4th 584. According to the Seventh Circuit, it would be "inconsistent with the purpose of the statute" to conclude that such transactions were prohibited, because it would be "nonsensical" to read § 406(a)(1) "to prohibit transactions for services that are essential for defined contribution plans, such as recordkeeping and administrative services." Id. at 584-85. The Ninth Circuit panel "simply disagree[d] with [Oshkosh's] analysis," in part because it did not consider the explanation proffered by the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) concerning its amendment of § 408(b)(2)'s implementing regulation, which follows the literal reading of the statutory text. The Ninth Circuit panel said it was "hard-pressed to find the best reading of the statutory text, as corroborated by the agency tasked with administering the relevant regulations, 'nonsensical.'"

Bugielski sets up a circuit split that could ultimately reach the Supreme Court — unless, that is, the Ninth Circuit agrees to rehear the panel's decision en banc and changes course. Because the panel's decision expands the universe of arrangements that qualify as prohibited transactions under ERISA, and almost certainly opens the door to litigation based on the theory that plan fiduciaries violate their duties to act in the best interest of plan participants whenever they simply add services to existing contracts, several groups have urged the Ninth Circuit to grant rehearing and vacate the panel's decision. 

Among the amici, the ERISA Industry Committee (ERIC), the American Benefits Council, the Society of Professional Asset Managers and Recordkeepers (the SPARK Institute), and the Committee on Investment of Employee Benefit Assets Inc. (CIEBA) argue that the panel's decision "renders standard and ubiquitous contracts in American retirement plans presumptively unlawful." According to the industry groups, the "panel's decision suggests that any modification or renegotiation of existing service provider agreements would be a prohibited transaction, absent a showing that the 'transaction' (i.e., 'the amendment of the contract') fits within one of the statutory prohibited transaction exemptions." And, although the panel did not believe its opinion would "frustrat[e] ERISA's statutory purpose," the groups say that "making every modification of service-provider agreements a presumptively unlawful, prohibited transaction (unless an affirmative defense is established)" would "open the floodgates to speculative recordkeeping claims" and "nullify years of jurisprudence on the standards plaintiffs must meet in pleading claims related to excessive retirement plan fees." They argue that

[t]he theory blessed by the panel's opinion provides plaintiffs (and plaintiffs'-side law firms) a roadmap to surviving dismissal, by replacing prudence-based fee challenges (in which the reasonableness of fees is plaintiffs' burden to plausibly plead) with prohibited transaction claims (where plaintiffs need only plead a re-negotiation of a service provider contract without allowing defendants to assert an affirmative defense at the motion to dismiss stage).

Separately, the U.S. Chamber of Commerce, quoting Lockheed Corp. v. Spink, 517 U.S. 882, 893 (1996), argues that the Ninth Circuit panel's decision applies ERISA's provisions "well beyond their original function in ERISA, which was to target potentially harmful commercial relationships that could 'jeopardize the ability of the plan to pay promised benefits.'" According to the Chamber, the plaintiffs' "prohibited-transaction claim does not target that type of commercial relationship. It targets an arms'-length decision plan fiduciaries made to increase and improve the services available to plan participants from a third-party provider that makes these services broadly available in the retirement plan marketplace." In short, the Chamber asserts that the panel's "overly broad interpretation of ERISA's prohibited-transaction provisions creates perverse litigation incentives and leads to reduced service offerings": Bugielski "will discourage plan sponsors and fiduciaries from transacting with third parties to offer the beneficial services that employees overwhelmingly favor and need," and for plans that nonetheless continue to offer those services, "it will make the plan sponsors and service providers sitting ducks for ERISA class actions that are ultimately meritless." 

Under the Ninth Circuit's internal operating procedures, many options are available to the court: if the Bugielski panel votes to deny AT&T's petition for rehearing en banc be denied, any judge may call for a vote to rehear the case en banc; any active or senior judge may propose to the panel that it amend its disposition; and before a vote on an en banc call, the panel may withdraw its opinion and issue a new one or modify its original opinion. We will be sure to keep you posted.

Comment Period for MHPAEA Proposed Rule Extended to October 17

On September 19, 2023, the DOL, the Department of the Treasury (Treasury), and the Department of Health and Human Services (HHS) extended the comment period for the proposed rulemaking, Requirements Related to the Mental Health Parity and Addiction Equity Act (MHPAEA). The new deadline is October 17, 2023. DOL simultaneously extended to October 17, 2023, the comment period for Technical Release 2023-01P, which was published along with the proposed rule.

Upcoming Speaking Engagements and Events

On October 17, Joanne Roskey will present, "Headaches, Heartburn, and Anxiety - Mental Health Parity Policy Implications," to members of the ERISA Industry Committee.

On October 31, Joanne Roskey and Dawn Murphy-Johnson will present, "State Legislative Activities Impacting Employee Benefits," an American Staffing Association webinar.

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