ERISA: The Enemy Of Working Families
In 1974, spurned by the collapse of the Studebaker Corporation and the corresponding loss of pension benefits, Congress enacted the Earned Retirement Income Security Act (“ERISA”) nominally “to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries” by ensuring the financial stability of employee benefit plans. 29 U.S.C. § 1001(b). Congress’ intentions were good — we’d all like to see pensions protected — but ERISA hasn’t accomplished much in practice. Just ask the 5,000 people who used to work at Enron, all of whom watched their $2.1 billion in retirement savings go up in smoke, or the fine employees of Hostess, which diverted pension benefits to fund its own operations, only to go bankrupt anyway.
Another purpose of ERISA was to provide “appropriate remedies, sanctions, and ready access to the Federal courts.” 29 U.S.C. § 1001(b). That purpose has failed miserably, the victim of judicial interpretation. Notice in that second link above what the Chair of the American Bar Association’s ERISA and Pension Litigation Subcommittee called the Hostess sham: a “betrayal without remedy.”
The majority of ERISA litigation can be summed up in a single sentence: the plaintiff seeks to avoid ERISA while the defendant seeks to apply it. As Professor Andrew Stumpff described in his law review article “Darkness at Noon,” since ERISA’s enactment, “the strength of an ERISA plaintiff’s legal position has steadily eroded, to the point where today it is routinely the case that a plan participant can prevail only if he is able to persuade the court that ERISA does not apply to his case.” If the cheated plaintiff — such as a beneficiary improperly denied health insurance coverage from an employer-sponsored plan — can avoid ERISA, they might recover compensation; if they cannot avoid ERISA, then they are typically “without remedy.”
So much for “income security.”
The biggest problem is, just like in pharmaceutical and medical device lawsuits, federal preemption. It’s a one-two punch. First, ERISA “preempts” state laws (like the bad faith claims that insurance beneficiaries can typically bring against insurers who improperly deny coverage, or the breach of fiduciary duty claims investors can typically bring against financial advisors who mismanage investments), so that beneficiaries can’t bring any of the normal claims against employer-sponsored pension and health care plans. Second, ERISA’s built-in remedies are nearly worthless, and everything from investment decisions to health care benefit decisions is reviewed merely for an abuse of discretion, with the ERISA plans allowed to grant themselves the discretion to interpret their own contract language. Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (2008). Under ERISA’s built-in remedies, for example, even when a benefit plan run by the company invests most of the plan’s money in the company’s own stock — which would normally be considered a blatant conflict of interest — the benefit plan is presumed to have acted appropriately.
How did a law intended to protect employees and their families end up shutting the courthouse doors to them?
The problem starts with Congressional drafting. The expansive but ambiguous text and structure of ERISA has driven many federal courts into fits of disgruntled prose. As Judge Marrero of the Southern District of New York lamented,
In our time, ERISA, as the issues now before the Court illustrate, has, in the relatively brief period of its existence, come to earn the distinction as our modern contender for high rank in the law’s order of obscurity. As one court perceived it, and styled in one of the many other metaphors the statute has inspired to portray its formidable labyrinths, ERISA is ‘a veritable Sargasso Sea of obfuscation.’ Indeed, the Supreme Court itself, laboring through an interpretation of the statute, took the occasion to comment on the ‘unhelpful text and the frustrating difficulty of defining its key term ….’ Undaunted, this Court now offers a contribution to this debate, even if its flicker may be likened to striking yet another match in a black hole, if nothing else, for the value that the instant its time and spark exists may serve in guiding the next bearer of the torch.
Atlantis Health Plan, Inc. v. Local 713, I.B.O.T.U., 258 F. Supp. 2d 284, 288 (S.D.N.Y. 2003)(citations omitted).
Some jurists falsely claim that ambiguity can be resolved by mechanically applying various interpretive canons, but, because different canons suggest differing results, a judge who wants a particular result need only pick the right canon to create that result. Courts have generally filled ERISA’s ambiguous void with decisions that are unfavorable — sometimes outright hostile — to participants and beneficiaries.
Last week, the Supreme Court slanted the playing field even more in favor of employers in their dealings with injured beneficiaries. The facts of US Airways, Inc. v. McCutchen are depressing. James McCutchen was horribly injured in a car accident, suffering between $1 million and $1.75 million in damages, including $66,866 in past medical expenses covered by his health insurance plan sponsored by his employer, U.S. Airways. But there was a problem: the driver had only $100,000 in liability coverage to compensate the four individuals injured in the accident, including McCutchen, all of whom were seriously injured or killed. McCutchen and his wife settled with the driver for $10,000, then settled their underinsurance claim with their own car insurance company for policy limits of $100,000. After subtracting the attorney’s fees, the McCutchens were left with a whopping $66,000 for a serious, life-altering accident. U.S. Airways, in a fit of lazy greed that would make even Gordon Gekko proud, demanded McCutchen pay it back for the whole $66,866 — more than the entire amount McCutchen had collected.
In other words, U.S. Airways paid back its loyal employee for his service by demanding he pay $866 for the privilege of recovering reimbursement U.S. Airways’ medical expenses for it, free of charge, despite the fact that his settlement reflected a mere tenth of his overall lost wages, future medical care, and other damages.
The Supreme Court unanimously said that, under ERISA, U.S. Airways could do that. The Court held that, although ERISA uses the language of trust law throughout it, it doesn’t actually incorporate any principles trust law that might help beneficiaries. ERISA would allows the plan to demand full reimbursement, with no deductions for the inadequate size of the settlement, or for the attorney’s fees. Everyone with an employer-sponsored health insurance plan who wins a personal injury settlement now has to pay for their benefits twice: once by accepting a lower salary in exchange for benefits (a common quid-pro-quo, particularly with large, unionized workforces), then again out of the settlement.
The McCutchens won a small victory: five Justices said that an ambiguity in the language of U.S. Airways plan itself meant that U.S. Airways had to reduce its demand by 40% to pay for the lawyer. The McCutchens thus walk away from their serious accident with a whopping $25,000 or so for James’ serious, permanent injuries, and U.S. Airways gets a windfall of $41,000. But that victory means nothing for the future: employers are already scrambling to amend their ERISA plans to eliminate the ambiguity, so that, in all future cases, they don’t have to reduce their demand even to pay for the lawyer that made the settlement possible.
In practice, what this means is that, every time an injured person goes to a lawyer, one of the first questions will be, “do your get your health insurance through an employer-sponsored plan?” If the answer is “yes,” then we have to dig deep into your medical bills and figure out the size of the lien just to know if it’s worth it for you to file a lawsuit at all. If, for example, a person is seriously injured in a car accident, their health plan pays for $75,000 in care, and there’s less than $125,000 in available insurance coverage, then it’s probably not worth it for them to file a lawsuit at all: between the ERISA reimbursement, attorney’s fees, and costs of suit, the injured person will take home only a trivial amount, even if their injuries are severe, and even if they will continue to need substantial medical treatment.
In a fair legal system, the law would take these issues into account, and would reduce the health plan’s reimbursement from the full $75,000 to a lower amount that accounts for the attorney’s fee (which was necessary to obtain the settlement at all) and for the fraction of the settlement intended to pay for past medical expenses as compared to lost wages, future medical needs, and other damages.
It doesn’t have to be this way. There’s no reason to grant ERISA plans special immunities from the laws that govern normal financial advisors and health care insurers, or special rights that neither Medicare nor private insurers have. Repeal or reform it and let employee benefit plans be governed by the same laws that govern everyone else.
[Update, March 2014: The underlying case is still ongoing, with the Western District of Pennsylvania just now allowing McCutchen to amend his pleadings to allege new allegations against U.S. Airways. Incredibly, it seems the case made it all the way to the Supreme Court with U.S. Airways never actually producing the Plan document until the Solicitor General's office asked for it, despite a court order requiring it to be produced back during the original litigation and despite their obligations under 29 U.S.C. § 1024(b)(4). Instead, it just asserted to the courts and the parties that they should trust its interpretation that the document allowed for full reimbursement.]