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Contributed by Russell l. Hirschhorn, Proskauer Rose LLP
ERISA plan fiduciaries sometimes find themselves in litigation defending the interpretation or legality of plan terms that were applied years, if not decades, earlier to calculate a participant's benefits. How is it that a participant, who has been receiving his or her benefits for years, could one day simply decide to challenge the calculation of his benefits without any regard to the applicable statute of limitations or the fact that he or she sat on his or her rights for years? The answer lies in the fact that although it is well-established that courts apply the most analogous state statute of limitations to claims of this nature (generally the period applicable to breach of contract actions), there has been a lack of clarity as to when such claims accrue, i.e., when the statute of limitations is triggered. Although most courts have held that a participant's claim for benefits accrues under ERISA § 502(a)(1)(B)1 upon "a clear repudiation by the plan that is known, or should be known, to the plaintiff — regardless of whether the plaintiff has filed a formal application for benefits,"2 there has been a lack of clarity in the courts' rulings on how the statute of limitations may be triggered short of a formal benefit claim denial. The U.S. Court of Appeals for the Second Circuit has now gone a long way toward addressing this issue. In Novella v. Westchester County, the Second Circuit held that the statute of limitations for a claim under Section 502(a)(1)(B)3 of ERISA based on a miscalculation of benefits will start to run "when there is enough information available to the pensioner to assure that he knows or reasonably should know of the miscalculation."4 In so ruling, the Court observed that receipt of a lower pension payment was not in this instance enough to put a pensioner on notice of a miscalculation, but that actual notice to a pensioner of the method used to calculate his pension would put him on notice. The Court observed that this rule may require a claimant-by-claimant factual inquiry into each pensioner's accrual date and that the need for such inquiries very well may limit the availability of class actions in this type of litigation.
Plaintiff Carlo Novella performed various jobs as a carpenter from 1962 through 1995. With the exception of certain periods between 1981 and 1987 when he was not working, his employers were required, pursuant to collective bargaining agreements, to make contributions on his behalf to a pension fund. In 1995, Novella became disabled as a result of a work-related injury and he applied for and received a disability pension. Novella's benefits were not calculated using the pension rate in effect in 1995, but rather using two different rates for his two periods of service. The rate applicable in 1995 was applied to benefits for work performed between 1987 and 1995, and the lower rate in effect in 1981 was applied to benefits for work performed between 1962 and 1981 ("two-rate formula"). The use of the 1981 rate for the earlier period resulted in a much lower aggregate monthly pension payment.
The District Court's Decisions
After exhausting his administrative remedies, Novella filed suit in the U.S. District Court for the Southern District of New York on his own behalf and on behalf of a putative class of pensioners whose benefits also were allegedly miscalculated based on the use of the two-rate formula. Novella asserted a potpourri of claims alleging violations of ERISA. The district court agreed with Novella that, regardless of whether it reviewed his claim under a de novo standard of review or the more deferential arbitrary and capricious standard of review, his disability pension had been miscalculated and the use of two rates in calculating disability pensions was not supported by the plan documents. In light of this ruling, the district court also awarded Novella prejudgment interest. It did not reach Novella's other claims. Novella subsequently sought class certification on behalf of two classes: one limited to disability pensioners, like himself, whose benefits were calculated using multiple rates and another, broader class that included recipients of various types of pensions whose benefits were affected by the same practice. The district court declined to certify the broader class in light of the fact that Novella's success was limited to his disability pension benefit claim. With respect to the proposed class of disability pensioners, the district court first concluded that the commonality, typicality, and adequacy-of-representation requirements of Rule 23 of the Federal Rules of Civil Procedure were met. However, it determined that an evidentiary hearing was necessary to determine whether, in light of defendants' statute of limitations arguments, Novella could satisfy the numerosity prong of Rule 23. After conducting the evidentiary hearing, the court concluded that the proposed class of twenty-four met the numerosity requirement. In so ruling, the court determined that the statute of limitations applicable to their claims did not begin to run "until a prospective class member inquires about the calculation of his benefits and the Plan rejects his claim that the benefits were miscalculated."5 The parties then cross-moved for summary judgment on the class claims. The district court granted the plaintiff class's motion upon recommendation from the magistrate judge and entered judgment in favor of the class. The court concluded, as it did with respect to Novella's individual claim, that defendants' interpretation of the plan to apply multiple rates in calculating Novella's pension benefit was arbitrary and capricious.
The Second Circuit's Decision
On appeal, the parties, having agreed that New York's six-year statute of limitations for breach of contract actions governed the claim for benefits and that the relevant date for fixing the accrual of a miscalculation claim is when a plaintiff was put on notice that defendants believed the method used to calculate his disability pension was correct, focused their dispute on the time at which a pensioner can be considered to have been put on such notice. Defendants argued that the Court should adopt the standard applied by the Third Circuit in Miller v. Fortis Benefits Insurance Co., 475 F.3d 516 (3d Cir. 2007), i.e., a strict first-payment approach under which the limitations period for a miscalculation claim would begin to run when the pensioner receives his or her first check. Novella contended that the Court should adopt the district court's bright-line rule that requires a formal denial of a miscalculation claim to trigger the running of the statute of limitations. The Second Circuit first affirmed the district court's decision that defendants' two-rate formula calculation of Novella's disability pension was arbitrary and capricious and affirmed its entry of summary judgment with respect to Novella's individual claim for benefits. In so ruling, the Court agreed that the plan terms did not support the plan's interpretation that a disability pension may be calculated using two different benefit rates when a participant has had a break in service. The Court, however, declined to affirm the district court's decision to certify a class and award summary judgment in favor of the class. As discussed above, the decision to certify a class, and in particular the question of whether the certified class satisfied Rule 23(a)'s numerosity requirement, hinged on whether each class member's claim was timely. The Court rejected both parties' views regarding the accrual date of the claim, and concluded that "notice of a miscalculation can be imputed to a pensioner — and the statute of limitations will start to run — when there is enough information available to the pensioner to assure that he knows or reasonably should know of the miscalculation." The Court reasoned that this approach "best balances a pension plan's legitimate interest in predictability and finality with a pensioner's equally legitimate interest in having a fair opportunity to challenge a miscalculation of benefits once it becomes known — or should have become known — to him." Turning to the factual record before it, the Court was unable to determine whether, and if so when, each class member had information by which he knew or should have known of the miscalculation. The Court thus vacated the district court's decision certifying a class and remanded for further fact-finding. In so ruling, the Court provided some insight on what it would and would not deem to be sufficient notice to trigger the limitations period: We note that . . . simply receiving a lower pension payment is not enough to put a pensioner on notice of a miscalculation. Conversely, actual notice to a pensioner that a double rate method was used would put him on notice. Similarly, informing a pensioner of the correct rate-times-units calculation, so that any difference between the putative calculation and the actual amount of the check would be obvious, is also probably enough.6 In rendering its ruling, the Court observed that the Third Circuit endorsed a similar reasonableness standard in Miller by concluding that the limitations period for a miscalculation claim starts to run when the calculation or repudiation is "both clear and made known to the beneficiary and that this ordinarily will be when the beneficiary first receives his miscalculated benefit award because, at that point, the beneficiary should be aware that he has been underpaid and that his right to a greater award has been repudiated." In addition, although apparently not raised by either party, the Court rejected the continuing violation theory under which each payment based upon an alleged miscalculation constitutes a new breach and thus gives rise to a separate cause of action, an approach that had been adopted by some courts. The Court determined that this theory is appropriate only "where separate violations of the same type, or character, are repeated over time." Benefit miscalculation claims, however, "are based on a single decision that results in lasting negative effects." Lastly, the Court observed that the standard it adopted may require a claimant-by-claimant inquiry to determine when a pensioner knew or reasonably should have known that his benefits were miscalculated. "And this fact-dependent inquiry into each pensioner's accrual date may in turn lessen the value, and indeed the availability, of class actions in this kind of litigation."7
The Court's decision has at least two significant implications for benefit claim litigation. First, the Second Circuit's ruling is a welcome addition to those courts that have recently shown a greater willingness to find that the limitations period has run as of the time a participant commences receipt of his/her benefit payments. In addition to the Third Circuit's decision in Miller (discussed above), the Seventh Circuit recently ruled in Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, see Bloomberg Law Reports, Labor & Employment, The View from Proskauer, Seventh Circuit Confirms that Receipt of Benefit Distribution Can Trigger Statute of Limitations; Also Precludes Deference to Plan Administrator Where No Discretion Exercised, Vol. 5, No. 30 (July 18, 2011) that the receipt of a lump sum distribution constituted an "unequivocal repudiation of any entitlement to benefits beyond the account balance" because information circulars previously circulated "confirmed that after a lump sum distribution, no additional benefits would be forthcoming."8 These decisions will hopefully reduce the opportunities for participants to litigate claims long after their benefits commence. It remains to be seen whether the courts will eventually apply the logic of the Second Circuit's ruling to commence the limitations period even before the receipt of benefits where the participant has been placed on adequate notice of his or her claim beforehand, as it has done in the independent contractor cases.9 Second, the Court's decision is likely to reduce the number of benefit claim litigations that can be successfully prosecuted on a class-wide basis. Where, as in Novella, absent class members started receiving their pension distributions at varying times, it very well may be necessary to conduct a fact intensive participant-by-participant inquiry to determine whether such claims are timely. And, as the Second Circuit recognized, such inquiries ought to preclude a finding of commonality and typicality among the claims and ultimately preclude class certification. The Court's ruling emphasizes the need to provide clear participant communications, e.g., summary plan descriptions and benefit statements, that clearly describe how participants' benefits are calculated, and to maintain records of such communications. Plan fiduciaries should consider reviewing their plan communications and the plan's document retention policies related to such communications. To be able to take full advantage of a potential statute of limitations defense, it will be critical to have provided clear and unambiguous participant communications, including with respect to the method for calculating plan benefits, and to have held on to such records.
Mr. Hirschhorn is a Senior Counsel in Proskauer's Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, resident in the New York Office.
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