10 Key ERISA Cases: Firestone Tire v. Bruch and the Standard of Review
Every ERISA benefits case turns on a legal question: De novo review or abuse of discretion review?
The standard a court will apply to review a benefits determination dictates litigation strategy and is a major factor in assessing the likelihood that a claim will succeed. This is because “the validity of a claim to benefits under an ERISA plan is likely to turn on the interpretation of terms in the plan at issue.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 415 (1989).
Firestone is first in our “10 Key ERISA Cases” series examining key Supreme Court and Ninth Circuit decisions governing ERISA benefits disputes.
The facts: In 1980 Firestone sold five plants constituting its plastics division to Occidental Petroleum.
Most of the 500 Firestone workers affected were rehired by Occidental at par salary.
Firestone maintained three un-funded ERISA-governed welfare benefits plans for those employees: a termination plan, a retirement plan, and a stock purchase plan.
Several re-hired employees claimed termination benefits and were denied, triggering a class-action suit.
The employees lost at the district court under an “arbitrary and capricious” standard, but won a reversal at the Court of Appeals under a “de novo” standard of review.
The Supreme Court granted certiorari to resolve circuit splits on the appropriate standard of review in ERISA benefits cases.
Holding: “[A] denial of benefits challenged under § 1132(a)(1)(B) is to be reviewed under a de novo standard unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.”
The Court rejected an “arbitrary and capricious” standard of review federal courts had adopted arising from the Labor Management Relations Act.
Instead, the Court held ERISA to be grounded in trust law, and that “trust principles make a deferential standard of review appropriate when a trustee exercises discretionary powers.”
Those powers, such as the power to interpret ambiguous terms and to determine eligibility for benefits, must be “vested in [the trustee] by the instrument under which they act.”
In the absence of plan language so empowering trustees, courts were to review ERISA benefit disputes “de novo,” with no deference to the administrator’s interpretation of the plan or facts.
Aftermath: Firestone led to cases testing whether particular plan language grants the necessary discretion.
Bogue v. Ampex Corp. (9th Cir. 1992) established that “[l]anguage that establishes only an entity's right to administer or manage a plan does not confer discretion.” But where “a plan includes even one important discretionary element, and the power to apply that element is unambiguously retained by its administrator, we may not second-guess the exercise of that discretion.”
Kearney v. Standard Ins. (9th Circuit 1999 (en banc)) rejected arguments that an insurance policy that requires “satisfactory proof” of disability grants discretion to the administrator.
Ingram v. Martin (9th Cir. 2001) rejected arguments that plan language simply designating a carrier responsible for determining eligibility and paying benefits granted discretion, underlining the requirement that grants of discretion be “unambiguous.”
Abatie v. Alta Health (9th Circuit 2006) Reviewing multiple decisions finding discretion on various wordings, the Ninth Circuit holds “[t]here are no ‘magic’ words that conjure up discretion on the part of the plan administrator.” Rather, reasonable “plan wording—granting the power to interpret plan terms and to make final benefits determinations—confers discretion on the plan administrator.”
Discretionary Bans: Discretionary language isn’t the end of the “abuse of discretion” story. Discretionary language in state-regulated insurance policies are often barred by state regulations.
Takeaway: Evaluating plan language and grants of authority to third-party insurers is a key step in assessing an ERISA benefits claim for litigation. There are no magic words reserving discretion to a Plan, but the reservation made must be unequivocal and general authorization to decide claims is not enough.