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Application of ERISA § 510 to Internal Workplace Complaints: A Review of Circuit Court Decisions

Thursday, November 3, 2011

Contributed by Christopher L. Williams, Proskauer Rose LLP

When enacting ERISA, Congress included a comprehensive enforcement regime "to preclude abuse and to completely secure the rights and expectations brought into being by this landmark reform litigation." Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 137 (1990) (citation omitted). One important component of this enforcement scheme is ERISA's anti-retaliation provision, which is set forth in Section 510 of the statute. In relevant part, Section 510 provides that it is unlawful "to discharge, fine, expel, or discriminate against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to" ERISA. 29 U.S.C. § 1140. Although Section 510 is clearly understood to apply to an employee who testifies in court or gives information to a regulatory agency, such as the Department of Labor, it is less clear whether and how Section 510 applies to internal workplace complaints. Even though the federal courts of appeals have been sharply divided on this issue, the United States Supreme Court recently declined an invitation to resolve the conflict. Edwards v. A.H. Cornell & Son, Inc., 131 S. Ct. 1604 (2011). As a result, we can expect that the issue will remain a point of contention among the lower courts. Given the unresolved circuit split regarding the proper interpretation of ERISA's anti-retaliation provision, we take this opportunity to review the case law that has provoked the conflict.

Ninth Circuit

The Ninth Circuit was the first circuit court to address whether Section 510 protects employees who make unsolicited complaints and objections to company management regarding alleged ERISA violations. In Hashimoto v. Bank of Hawaii, 999 F.2d 408 (9th Cir. 1993), the plaintiff alleged that she was discharged in retaliation for raising potential ERISA violations to her supervisors and objecting to directives to engage in conduct that she believed would violate ERISA. The Ninth Circuit determined that the plaintiff's allegations fell squarely within the scope of Section 510, reasoning that an employee who "present[s] the [ERISA] problem first to the responsible managers of the ERISA plan" is entitled to the protections the statute. Id. at 411. In reaching this conclusion, the court first observed that the statutory text of Section 510 "may be fairly construed to protect a person in [the employee's] position if, in fact, she was fired because she was protesting a violation of law in connection with an ERISA plan." The court further reasoned that construing ERISA's anti-retaliation provision to exclude internal workplace complaints would render its protections a nullity: The normal first step in giving information or testifying in any way . . . would [be to] present the problem first to the responsible managers of the ERISA plan. If one is then discharged for raising the problem, the process of giving information or testifying is interrupted at its start: the anticipatory discharge discourages the whistle blower before the whistle is blown. Hashimoto, 999 F.2d at 411. Thus, the court's holding in Hashimoto was premised on the policy rationale that a failure to protect internal workplace complaints would undermine the remedial purposes of Section 510 because it would allow an employer to avoid ERISA's anti-retaliation provision simply by discharging a complaining employee before the commencement of formal proceedings.

Fifth Circuit

The Fifth Circuit was the next federal appellate court to address whether Section 510 applies to internal complaints and it likewise concluded that it does. In Anderson v. Electronic Data Systems Corporation, 11 F.3d 1311 (5th Cir. 1994), the plaintiff, who was responsible for administering pension plan investments, contended that he was demoted and later terminated for reporting a colleague's violations of ERISA and for refusing to engage in similar conduct. Without relying on (or even citing) the Ninth Circuit's decision in Hashimoto, the Fifth Circuit reached the same conclusion: the protections of ERISA § 510 protect individuals retaliated against for "reporting [ERISA] violations to management…." Id. at 1314. Although the Fifth Circuit in Anderson embraced a broad interpretation of ERISA's anti-retaliation provision, its holding gave cursory treatment to the statutory text and provided little analysis to support its conclusion that the provision applies to internal complaints. Instead, the Anderson court simply stated that Section 510 "broadly prohibits . . . the discharge or other adverse treatment of any person because he has given information or testimony relating to ERISA" and summarily concluded that the plaintiff's claim "falls squarely within the ambit" of the statute. Id. at 1315. Notwithstanding the absence of any meaningful analysis, it is at least arguable that the Fifth Circuit's determination that Section 510 should be liberally construed to provide expansive protections is grounded on the same policy considerations espoused by the Ninth Circuit in Hashimoto.

Fourth Circuit

Faced with the same issue, the Fourth Circuit became the first federal appellate court to conclude that ERISA's anti-retaliation provision does not apply to internal workplace complaints. In King v. Marriot International, Inc., 337 F.3d 421 (4th Cir. 2003), a human resources manager was allegedly terminated after complaining to management about planned transfers of assets from the company's medical plan into its general corporate reserve account. In concluding that the plaintiff was not entitled to invoke the protections of Section 510, the Fourth Circuit's analysis focused on the provision's statutory text. Id. at 427-428. The Fourth Circuit first addressed the scope of the phrase "inquiry or proceeding." Relying on its interpretation of a similar provision in the Fair Labor Standards Act (FLSA), the Fourth Circuit found that these terms "referred only to administrative or legal proceedings, and not to the making of an intra-company complaint." Id. at 427. Additionally, King found that the use of the phrase "testified or is about to testify" in Section 510 buttressed its determination that the "inquiry or proceeding" referenced in the statute contemplated more formal actions "than written or oral complaints made to a supervisor." Id. Although the Fourth Circuit acknowledged its decision conflicted with the Ninth Circuit's holding in Hashimoto and the Fifth Circuit's decision in Anderson, it criticized the reasoning of those cases as "unpersuasive." Id. at 428. In particular, King found that the Fifth Circuit's decision was flawed because it "merely recited section 510 without even addressing the facial inapplicability of section 510 to intra-office complaints." Id. The King panel also considered the Ninth Circuit's reasoning to be equally unpersuasive because its holding was grounded on policy preferences rather than the statutory text of Section 510. Id.

Second Circuit

In Nicolaou v. Horizon Media, Inc., 402 F.3d 325 (2d Cir. 2005), the defendant's former director of human resources claimed that she was demoted and discharged because she informed her supervisors that a payroll discrepancy was causing the company's 401(k) plan to be underfunded. Adopting a middle ground between the Ninth and Fifth Circuits' broad view and the Fourth Circuit's narrow construction, the Second Circuit held that Section 510 protects internal complaints, but only when made in response to an inquiry initiated by the employer. Id. at 329-330. Thus, an employee-initiated internal complaint falls outside the reach of Section 510 under the reasoning articulated by the Nicolaou court. Departing from the Fourth Circuit's analysis in King, the Second Circuit determined that the plain language of Section 510 was "unambiguously broader" than its FLSA counterpart because it includes the less formal term "inquiry."1 Id. at 328. Thus, the Nicolaou court found it inappropriate to rely on previous interpretations of the FLSA's anti-retaliation provision when determining the reach of Section 510. Id. at 328-329. Given the inclusion of the term "inquiry" in Section 510, the Second Circuit reasoned that "the proper focus is not on the formality or informality of the circumstances under which an individual gives information, but rather on whether the circumstances constitute an 'inquiry.'" Id. at 330. Accordingly, Nicolaou concluded that the plaintiff's allegations could support a claim under Section 510 if she could demonstrate that her employer requested she meet with management to provide information about potential ERISA violations.

Third Circuit

The Third Circuit is the most recent circuit court to consider whether an employee's internal complaints are entitled to the protections of Section 510. In Edwards v. A.H. Cornell & Son, Inc., 610 F.3d 217 (3d Cir. 2010), the defendant's former human resources manager allegedly discovered that the company was: (i) administering its group health plan on a discriminatory basis, (ii) misrepresenting the cost of group health plan benefits to dissuade some employees from enrolling, and (iii) fraudulently enrolling non-citizens in its benefit plans. According to the plaintiff, she was discharged from her position in retaliation for complaining about and objecting to these practices. A divided panel of the Third Circuit held the plaintiff's allegations were not protected on the grounds that the unambiguous language of ERISA's anti-retaliation provision did not encompass "unsolicited internal complaints." Id. at 225-226. The Edwards majority first concluded that the plaintiff had clearly "given information" by objecting and/or complaining to management and thus the sole question presented was whether she had done so in the context of an "inquiry or proceeding." Id. at 222-223. Citing Black's Law Dictionary definition of an "inquiry" as a "request for information," the majority determined that the plaintiff's allegations did not constitute an "inquiry" within the meaning of Section 510 because no one "approached her requesting information regarding a potential ERISA violation." Id. at 223. Because the plaintiff "made her complaint voluntarily, of her own accord[,]" the information she relayed to management was not part of an "inquiry" within the meaning of Section 510. Id. The majority also rejected the plaintiff's contention that her complaints and objections themselves amounted to an "inquiry" for purposes of ERISA's anti-retaliation provision. Id. According to the majority, because Section 510 protects employees who have "given information" and not those who have "received information," an ERISA "inquiry" includes only inquiries made of an employee, not those made by an employee. Id. In reaching this conclusion, the Edwards court acknowledged the circuit split as to whether ERISA's anti-retaliation provision encompasses unsolicited internal complaints, but rejected the holdings of the Fifth and Ninth Circuits because "[n]either court examined the statutory language of Section 510 in detail." Id. The Third Circuit also criticized the Ninth Circuit's decision in Hashimoto as being driven by improper policy considerations based on what it considered to be a "fair" interpretation of the statute. Id. Given the Third Circuit's view that the clear statutory language of Section 510 does not encompass unsolicited internal complaints, it refused to consider any policy arguments that a failure to protect them would thwart the purposes of the statute. The precise contours of the Third Circuit's holding in Edwards are unclear because the majority quotes passages from the Second Circuit's decision in Nicolaou holding that solicited internal complaints should be protected, as well as passages from the Fourth Circuit's decision in King concluding that Section 510 only extends to formal processes outside of the workplace. Id. For example, Edwards specifically notes that the plaintiff "made her complaint voluntarily, of her own accord" and thus "[u]nder these circumstances, the information that [the plaintiff] relayed to management was not part of an inquiry" protected by Section 510. Id. (emphasis added). At the same time, however, the Third Circuit seemingly endorses the Fourth Circuit's reasoning in King, which concluded that the "inquiry or proceeding" referred to in the statute is limited to "more formal actions" than internal workplace complaints. Id. Notwithstanding this apparent ambiguity, the Third Circuit's holding in Edwards makes one thing clear: unsolicited informal employee complaints are not protected.

Proskauer's Perspective

As it now stands, employers are subject to varying standards of liability depending on the circuit in which they are sued. The risks are particularly acute for companies with national or regional work forces since these companies may wind up subject to different rules for different employees. Subjecting employers to differing rules in different locations undermines the stated Congressional rationale for enacting ERISA in the first place: to provide a "uniform regulatory regime over employee benefits plans." Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004). Unfortunately, there appears to be no prospects for a near-term solution that will restore uniformity to the law governing these claims under Section 510. Given how entrenched the circuit courts appear to be in their positions, it would appear that a uniform application of these rules can be restored only by Congressional or Supreme Court intervention. The Supreme Court's recent denial of certiorari in Edwards renders it unlikely that it will be an available vehicle for resolution, and there is no indication that the issue will get on Congress's radar screen any time soon. In the absence of uniformity, we can expect that the plaintiffs bar will engage in a considerable amount of forum shopping when bringing these types of claims. Employer defendants will wish to consider the prospects of a motion to transfer venue to a friendlier forum. 

Christopher L. Williams (cwilliams@proskauer.com) is an Associate in the New Orleans, Louisiana office of Proskauer Rose LLP and is a member of the Firm's Employment Litigation & Arbitration and Employment Law Counseling & Training Practice Groups.

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