D.L. Markham DDS, MSD, Inc. 401(k) Plan v. Variable Annuity Life Ins. Co., No. 22-20540, __ F.4th __, 2023 WL 8642231 (5th Cir. Dec. 14, 2023)(Before Circuit Judges Clement, Haynes, and Oldham)

This published decision from the Fifth Circuit Court of Appeals turned on the court’s resolution of two important ERISA issues: (1) the recurring issue of who is a fiduciary and, in particular, when is a service provider to a plan acting as such; and (2) when does a service provider become a party in interest for purposes of ERISA’s prohibited transaction provisions. The case attracted competing amicus curiae briefs from the Department of Labor, which supported the plaintiffs, who were the sponsors and named administrators of a small 401(k) plan for employees of a dental practice (“Markham”), and from the Chamber of Commerce, which supported the insurance company, the issuer of the 401(k) plan’s group annuity contract and a service provider that maintained the retirement platform for the plan. The Fifth Circuit resolved both issues in favor of the insurance company.

Variable Annuity Life Insurance Company (“Variable Life”), entered into an annuity contract with the plan, and apparently also a separate contract with respect to the other services it provided. The annuity contract provided for a 5% surrender fee for funds transferred out of the contract that had been contributed within the past 60 months.

When the owners of the dental practice decided to terminate the annuity contract and discontinue services with Variable Life, the insurance company declined to waive the surrender fee. Instead, it imposed a 5% fee on all of the assets in the annuity contract to the tune of $20,703, a small amount to be sure, but approximately 4.6% of the assets of this small plan. The dental practice, through its husband and wife owners, then filed a putative class action suit claiming that by doing so Variable Life breached its fiduciary duties and engaged in a prohibited transaction.

Although the case was originally filed in California, it was transferred to the Southern District of Texas. That court granted Variable Life’s motion to dismiss on the grounds that it was neither a fiduciary nor a “party in interest” under ERISA with respect to its actions in imposing or collecting the surrender fee.

The Fifth Circuit agreed. First, the court of appeals considered and rejected Markham’s argument that Variable Life acted as a fiduciary in refusing to waive the fee, which it had the contractual discretion to do. The court saw its case law as clearly establishing “that a party must have discretion over more than the acceptance of payment to act as a fiduciary.” The court reasoned that Variable Life “merely charged the agreed upon surrender fee,” noting that other circuits “have held that accepting predetermined compensation does not constitute a fiduciary act.” The court concluded that “although VALIC had discretion to waive the fee, the PD Contract set a maximum fee and gave VALIC the right to retain it.”

With respect to the prohibited transaction issue, the court first noted that ERISA Section 406(a)(1)(C) applies to transactions for the “furnishing of goods, services, or facilities,” with a “party in interest,” which ERISA elsewhere defines to include “a person providing services to such plan.” Applying this definition, the court saw the relevant issue as whether Variable Life was “providing services to a plan” when it first entered into a contract with the plan.

The court concluded, contrary to the argument of the Department of Labor, that because Variable Life was not providing services to the plan when it contracted for the surrender fee, it was not a party in interest when it collected that fee.  In so holding, the court found unpersuasive a statement in the preamble to a DOL regulation concerning ERISA Section 408(b)(2), a prohibited transaction exemption, asserting that to be a “person providing services to a plan” does not require a preexisting relationship. The court was likewise unpersuaded that a 2021 amendment to ERISA section 408(b)(1) was on point because, in the Fifth Circuit’s view, there was no indication that Congress intended to broaden the definition of “party in interest,” and the amendment itself applies solely to group health plan providers, not pension providers.

The court also rejected Markham’s alternative argument that even if the contractual fee provision itself was not a prohibited transaction, the collection of the surrender fee was such a transaction. In this instance, the court looked to Section 408 as informing its analysis and concluded that the language of Section 408(b)(2)(A) “suggests that a ‘transaction’ refers to the establishment of rights and obligations between the parties – not the payment of funds pursuant to an existing agreement.” It found this reading consistent with what the court saw as the aim of Section 406 to “limit[] scrutiny to contracts involving preexisting relationships in order to prevent favoritism at the expense of plan beneficiaries.” The court distinguished a decision from the Fourth Circuit – Peters v. Aetna Inc., 2 F.4th 199 (4th Cir. 2021) – which the court read as holding that “a contract violation is a separate transaction rather than the continuation of an initial agreement.” Because plaintiffs did not contend that Variable Life violated the contract in refusing to waive the surrender fee, the court found Peters unhelpful to plaintiff’s position.          

Finally, the Fifth Circuit upheld the district court’s denial of the plaintiffs’ motion to amend their complaint. The court of appeals held that the district court acted within its discretion in denying the motion on grounds of undue delay and also because the motion did not provide sufficient detail about the new allegations or how they would cure the defects in the initial complaint.

With respect to the prohibited transaction holding in this case, it would seem impossible now in the Fifth Circuit to challenge unreasonable fees paid to a first-time service provider to a plan. This is a strange result indeed considering that prohibited transaction claims are usually brought not by plan fiduciaries but against them. And it is hard to imagine a more unreasonable and indeed abusive contractual term than one that locks a plan into a contract by penalizing any attempt to end the contractual relationship.     

Below is a summary of this past week’s notable ERISA decisions by subject matter and jurisdiction.

Attorneys’ Fees

Ninth Circuit

Asner v. SAG-AFTRA Health Fund, No. 2:20-CV-10914-CAS-JEMx, 2023 WL 8529996 (C.D. Cal. Dec. 7, 2023) (Judge Christina A. Snyder). Your ERISA Watch thought this breach of fiduciary duty class action involving the merger of the Screen Actors Guild and the American Federation of Television and Radio Artists and their respective health plans was over when, in October, the court issued a final order approving a settlement and judgment. (That order was Your ERISA Watch’s case of the week in our November 1, 2023 edition.) However, plaintiffs have since challenged the court’s award of attorney’s fees. Plaintiffs argued that while the court properly based its fee award on its valuation of the benefit to the class, the valuation was too low because it did not adequately reflect future payments into plaintiffs’ reimbursement accounts. The court rejected this argument, stating that it was “impossible” to calculate the amounts at issue, and even if did consider those amounts, its fee award was still fair and reasonable under Ninth Circuit case law: “The touchstone for an award of attorneys’ fees is reasonableness, not the result of a mechanical application of either a percentage of recovery or a lodestar-multiplier approach.” The court thus denied plaintiffs’ motion, and stayed any distributions from the settlement fund while plaintiffs decide whether to appeal.

Breach of Fiduciary Duty

Second Circuit

Cunningham v. USI Ins. Servs., LLC, No. 21 CIV. 1819 (NSR), 2023 WL 8603123 (S.D.N.Y. Dec. 12, 2023) (Judge Nelson S. Román). Plaintiff Lauren Cunningham, a participating employee in the USI Insurance Services, Inc. 401(k) retirement plan, brought this class action alleging that defendants breached their fiduciary duties of prudence and loyalty, and failed to adequately monitor other fiduciaries, in their administration of the plan. Defendants filed a motion to dismiss, which the court granted in March because plaintiff “(1) failed to allege sufficient facts to allow a reasonable inference that the same services were available from other retirement savings plans for a lower price and (2) failed to provide ‘any figures, estimates, or formulas’ to determine how she calculated the total direct and indirect fees paid by the Plan.” (Your ERISA Watch discussed this order in its April 6, 2022 issue.) Ms. Cunningham filed an amended complaint, and defendants once again filed a motion to dismiss. The court ruled that although plaintiff had cured the deficiencies related to her calculation of the fees, she failed to “sufficiently plead USICG’s fees are excessive or unreasonable compared to similarly-sized RSP providers providing similar services.” The court found that plaintiff’s allegations on this issue were “conclusory,” offered “apples to oranges comparisons,” and did not “sufficiently allege the same ‘basket of services’ provided by USICG were available for less on the market.” Thus, the court once again granted defendants’ motion to dismiss, but allowed plaintiff to file a second amended complaint to address the court’s concerns.

Eighth Circuit

Kloss v. Argent Tr. Co., No. 23-CV-0301 (WMW/TNL), 2023 WL 8603131 (D. Minn. Dec. 12, 2023) (Judge Wilhelmina M. Wright). Plaintiff Jessica Kloss is a former employee of Torgerson Properties, Inc. (TPI) and was a vested participant in its employee stock ownership plan (ESOP). She alleges that defendant Argent Trust Company, the trustee of the ESOP, terminated the ESOP and sold it to a friend of TPI’s CEO for below market value. She brought this action against Argent, TPI, TPI’s ESOP committee, and the CEO. Plaintiff contends that (1) Argent breached its fiduciary duties of prudence and loyalty under ERISA, (2) the TPI defendants are liable as co-fiduciaries for Argent’s breaches, and (3) the TPI defendants failed to adequately monitor fiduciary activity. The defendants moved to dismiss. The court mostly denied these motions, ruling that although plaintiff’s allegations were not substantial, they were sufficient to satisfy circumstantial pleading requirements. However, the court granted the CEO’s motion to dismiss, finding that the complaint did “not adequately allege a fiduciary role” for the CEO because he was not a part of the ESOP’s governing structure. For the same reason, the court granted Argent’s motion as to the claim of co-fiduciary liability with the CEO.

Tenth Circuit

Carimbocas v. TTEC Servs. Corp., No. 1:22-CV-02188-CNS-STV, 2023 WL 8555384 (D. Colo. Dec. 11, 2023) (Judge Charlotte N. Sweeney). Plaintiffs are participants in TTEC’s defined contribution 401(k) benefit plan who brought this class action alleging that TTEC and other defendants breached their fiduciary duties to plan participants by “failing to monitor and negotiate appropriate annual fees charged by trustees and by causing Plan participants to incur excessive investment fees.” Defendants filed a motion to dismiss. The court noted that plaintiffs’ claims were divisible into two general categories: one alleging that defendants charged excessive administrative and recordkeeping fees, and one alleging that defendants selected investment funds that carried excessive “expense ratio” fees. Addressing the first category, the court ruled that plaintiffs failed to “adequately identify a ‘meaningful benchmark’ comparator offering the same services as the TTEC Plan’s trustees at a lower price.” Similarly, regarding the second category, the court ruled that the complaint did not offer a “meaningful comparison between the investment objectives, strategies, or risk profiles” of TTEC’s plan funds versus other plans. Furthermore, because plaintiffs’ breach of fiduciary duty claims failed, their claim for breach of duty in monitoring other fiduciaries failed as well. The court thus granted defendants’ motion to dismiss, but gave plaintiffs leave to amend.

Class Actions

Ninth Circuit

In Re LinkedIn ERISA Litig., No. 5:20-CV-05704-EJD, 2023 WL 8631678 (N.D. Cal. Dec. 13, 2023) (Judge Edward J. Davila). This is a class action alleging breach of fiduciary duty and failure to monitor fiduciaries and co-fiduciary breaches under ERISA, based on defendants’ administration of a participant-directed 401(k) benefit plan. While motions to dismiss and for class certification were pending, the parties mediated the matter and reached an agreement, which was ratified by the court in this order granting final approval of class action settlement. Under the agreement, defendants agreed to pay $6.75 million into a fund to be allocated on a pro rata basis. This amount includes attorney’s fees and costs, the cost of class notice and settlement administration, taxes, and contribution awards. Class counsel agreed to seek to recover no more than one-third of the gross settlement amount in fees. The court ruled that the settlement was fair, reasonable, and adequate due to the risks of litigation and the fact that the settlement provided “monetary relief of approximately 68% of the midpoint, or $9,941,637.25, of the most likely range of losses from $3,943,017 million to $15,940,213 million.” No class members objected. The court did reduce the requested service awards of the named plaintiffs from $12,500 to $6,500, but otherwise approved the settlement in full, awarding plaintiffs’ counsel $2.25 million in fees and $119,386.02 in litigation costs.

Disability Benefit Claims

Ninth Circuit

Atanuspour v. Reliance Standard Life Ins. Co., No. 22-55765, __ F. App’x __, 2023 WL 8663879 (9th Cir. Dec. 15, 2023) (Before Circuit Judges Graber, Christen, and Owens). In this brief memorandum disposition, the Ninth Circuit affirmed the district court’s ruling upholding defendant Reliance Standard’s decision to deny plaintiff Theodor Atanuspour’s claim for ERISA-governed long-term disability benefits. Plaintiff argued that the district court erred by ruling that medical evidence from after the benefit plan’s waiting period could not demonstrate disability during that time period. However, the Ninth Circuit “read the district court’s decision differently,” and concluded that the district court did not clearly err by finding that the additional records were insufficiently persuasive.

ERISA Preemption

First Circuit

Bernier v. Metropolitan Life Ins. Co., No. 22-CV-11660-ADB, 2023 WL 8623402 (D. Mass. Dec. 13, 2023) (Judge Allison D. Burroughs). This is an action for benefits under an ERISA-governed life insurance employee benefit plan. Defendant MetLife denied plaintiffs’ benefit claim, contending that the decedent lost her supplemental coverage when she stopped working. Plaintiffs filed this action in state court, alleging breach of contract and bad faith insurance practices. MetLife removed the case to federal court and filed a motion for summary judgment, arguing that plaintiffs’ claims are preempted by ERISA. The court granted MetLife’s motion in this order. The court ruled that an ERISA plan existed, and that plaintiffs’ claims “relate to” the plan because they “stem from MetLife’s alleged failure to pay Plaintiffs $250,000 under the Decedent’s supplemental life insurance coverage.” The court gave plaintiffs 30 days to file an amended complaint stating causes of action available under ERISA.

Second Circuit

Rowe Plastic Surgery of N.J., LLC v. Aetna Life Ins. Co., No. 23-CV-8521 (JSR), __ F. Supp. 3d __, 2023 WL 8534865 (S.D.N.Y. Dec. 11, 2023) (Judge Jed S. Rakoff). A medical provider sued Aetna for breach of contract and other state law causes of action in state court for underpaying benefits. Aetna filed a motion to dismiss, arguing that the claims were preempted by ERISA and failed to state a claim. The court began by refusing to consider documents defendant offered from outside the complaint, including the summary plan description, because they were not incorporated by reference in the complaint, were not integral to the complaint, and were not subject to judicial notice. The court also refused to dismiss on preemption grounds because the complaint did not mention ERISA or any plans governed by ERISA. However, the court granted the motion because plaintiffs’ claims were “legally defective.” Specifically, the court ruled that (1) Aetna’s telephone calls with plaintiff about the reimbursement rate were not an “offer to pay,” (2) Aetna did not make a clear and unambiguous promise, (3) Aetna was not unjustly enriched, and (4) Aetna’s telephone calls did not represent a fraudulent inducement. The court thus granted the motion to dismiss, with prejudice.

Life Insurance & AD&D Benefit Claims

Fifth Circuit

King v. Metropolitan Life Ins. Co., No. 3:23-CV-01175-M, 2023 WL 8656023 (N.D. Tex. Dec. 14, 2023) (Judge Barbara M.G. Lynn). Plaintiff Laureen King filed this action in state court, alleging that defendant Metropolitan Life Insurance Company committed breach of contract by failing to pay her accidental death benefits. MetLife responded by removing the case to federal court based on ERISA preemption and filing a motion to dismiss for failure to state a claim. MetLife argued that the decedent did not have accidental death benefit coverage at the time of his death because he died six days after he voluntarily terminated his employment, which under the employee benefit plan triggered the termination of his coverage. The court was persuaded, granted MetLife’s motion, and dismissed the action with prejudice.

Sixth Circuit

Johnson v. Metropolitan Life Ins. Co., No. 22-11779, 2023 WL 8602987 (E.D. Mich. Dec. 12, 2023) (Judge Sean F. Cox). As the court noted, this is a “somewhat unusual insurance interpleader case, in that none of the potential claimants appeared in this case and asserted that the insurance proceeds should be awarded to them.” The administrator of the decedent’s estate originally filed suit against MetLife in probate court seeking to stop MetLife from distributing life insurance proceeds to the decedent’s ex-husband. MetLife removed the action to federal court based on ERISA preemption, and filed a third party complaint for interpleader against three potential beneficiaries. However, none filed a responsive pleading. As a result, MetLife filed a motion for default judgment against all of the defendants based on their failure to appear, which the court granted in this order. The court further ordered that the insurance proceeds be paid to the decedent’s estate pursuant to a plan provision which states that if there is no beneficiary at the time of death, benefits may be paid to the estate.

Medical Benefit Claims

Ninth Circuit

Elazouzi v. Aetna Life Ins. Co., No. EDCV 22-0858-JGB-SPx, 2023 WL 8530010 (C.D. Cal. Dec. 7, 2023) (Judge Jesus G. Bernal). Plaintiff Eula Elazouzi underwent a Roux-en-y gastric bypass. She submitted a claim to her ERISA-governed medical benefit plan, which was administered by defendant Aetna. Aetna, following its clinical policy bulletins (CPBs), denied the claim on the ground that the treatment was excluded from coverage because it was “experimental and investigational.” The parties filed trial briefs, and the court issued its decision in this order. Under de novo review, the court ruled that Ms. Elazouzi “has carried her burden of establishing that her claim is not excluded under the Plan as ‘experimental and investigational.’” Specifically, the court found that the plan language regarding “experimental and investigational” treatment listed five restricting criteria, none of which were cited by Aetna in denying the claim. Instead, Aetna relied on its CPBs, but these were not referenced or mentioned by the plan and thus the court ruled that Aetna could not rely on them. As a result, the court ruled in plaintiff’s favor, and remanded the action to Aetna to make a medical necessity determination.

Tenth Circuit

S.H. v. Cigna Health & Life Insurance Co., No. 2:22-CV-552-TC, 2023 WL 8530123 (D. Utah Dec. 8, 2023) (Judge Tena Campbell). The plaintiffs in this action are a parent (S.H.) and son (J.H.) who sought medical benefits from Cigna for J.H.’s treatment at two behavioral health facilities in Utah. The parties filed cross-motions for summary judgment, which were decided in this order. The court first addressed J.H.’s treatment at Evoke at Entrada. Cigna denied coverage at Evoke on the ground that the treatment was “wilderness therapy” and thus was “experimental, investigational or unproven.” Plaintiffs contended that they submitted to Cigna “lengthy peer-reviewed reports and documents that they claim establish that wilderness therapy is not ‘experimental,’” which Cigna ignored and did not address. The court agreed that Cigna did not give plaintiffs a full and fair review because it did not present “a sufficient or reasoned basis as to why J.H.’s treatment at Evoke was within the Plan’s exclusion.” The court also noted that Cigna’s own internal policies showed that “the efficacy of wilderness therapy is not static but is evolving.” The court thus remanded to Cigna “to explain[], consistent with the Plan, ERISA, and this court’s decision, why the Plan’s experimental exclusion applies to J.H.’s treatments at Evoke.” As for J.H.’s treatment at the second facility, Live Strong, the court ruled that Cigna’s denial was confusing because it used residential treatment criteria when in fact the treatment J.H. received was intensive outpatient treatment. Cigna also “failed to engage with the materials and opinions presented by the Plaintiffs as to the appropriateness of J.H.’s care,” and relied on improper guidelines. The court thus remanded this claim as well so that Cigna can use proper standards to evaluate J.H.’s treatment at Live Strong.

Pleading Issues & Procedure

Ninth Circuit

Fremont Emergency Servs., LTD v. UnitedHealthcare Ins. Co., No. 2:22-CV-01118-CDS-BNW, 2023 WL 8556229 (D. Nev. Dec. 8, 2023) (Judge Cristina D. Silva). The plaintiff, a Nevada-based group of emergency medical professionals, sued UnitedHealthcare Insurance Company, alleging that it illegally “downcoded” medical benefit claims, and requested injunctive relief. However, United had previously sued plaintiff’s corporate parent, TeamHealth, in the Eastern District of Tennessee, alleging that TeamHealth was illegally “upcoding” medical benefit claims. United filed a motion to dismiss this action under the “first-to-file” rule on the ground that the actions are part of the same dispute. The court mostly agreed with United, ruling that the Tennessee suit was filed first, the parties were substantially similar, and the issues were substantially similar. However, the court chose to stay the action rather than dismiss it, and instructed the parties to notify the court when the Tennessee suit resolved.

Eleventh Circuit

Taylor v. University Health Servs., Inc., No. CV 123-047, 2023 WL 8654395 (S.D. Ga. Dec. 14, 2023) (Judge J. Randal Hall). The plaintiffs in this action are 174 former employees of defendant University Health Services who alleged they entered into a written contract with UHS providing that when they reached age 65, they would be furnished with a Medicare supplemental insurance policy at no cost. Piedmont Healthcare, Inc. took over the operations of UHS at plaintiffs’ location and informed plaintiffs that it did not think it was contractually obligated to continue paying the benefits, but would do so anyway on a voluntary basis. Plaintiffs filed an action in state court requesting declaratory relief. Defendants removed the case to federal court, citing ERISA preemption, and filed a motion to dismiss based on lack of standing. The court agreed that plaintiffs had no standing, ruling that because they continued to receive benefits, they had not yet suffered any actual harm. Because plaintiffs had no standing, the court had no jurisdiction, and thus its “only option” was to remand the case back to state court.


Sixth Circuit

Burdine v. Burdine, No. 1:22-CV-00383, 2023 WL 8539427 (S.D. Ohio Dec. 11, 2023) (Judge Jeffery P. Hopkins). This is a pension benefit case in which plaintiff Chuck Burdine has accused other members of his family of improperly influencing his father to change his beneficiary before he died. Burdine filed an action alleging several state law causes of action. The defendant pension fund responded with a motion to change venue, arguing that the plan contained a forum selection clause requiring parties to litigate disputes in the federal district court for the District of Columbia. The court agreed and granted the motion, finding the clause enforceable. The court acknowledged the Burdine defendants’ complaints regarding the financial strain of litigating elsewhere, but ruled that they had “not shown that this is one of the very rare cases where public-interest factors tilt the scales towards non-enforcement of an otherwise enforceable forum-selection clause.”