Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...
Oct. 20 — In a move that will benefit health plan sponsors and their participants, the U.S. Supreme Court declined to hear Blue Cross Blue Shield of Michigan's appeal of a $6 million judgment entered against it for charging hidden administrative fees to its client health plan sponsors.
The judgment, which was upheld by the U.S. Court of Appeals for the Sixth Circuit in May, ultimately could benefit many more plan sponsors than just Michigan-based Hi-Lex Controls Inc.
More than 20 lawsuits challenging BCBSM's administrative fees have been filed throughout the Sixth Circuit in recent years, with at least two coming right on the heels of the Sixth Circuit's ruling in Hi-Lex.
These lawsuits accuse BCBSM of breaching its fiduciary duties under the Employee Retirement Income Security Act by imposing hidden administrative fees and mark-ups beginning in 1993. They also involve two hot-button issues in ERISA litigation—the scope of the “fraud or concealment” exception to ERISA's statute of limitations, and the extent to which a third-party service provider can qualify as an ERISA fiduciary.
The Sixth Circuit consistently has found BCBSM to be an ERISA fiduciary with respect to these fees, and it ruled in Hi-Lex that the company's lawsuit was timely given BCBSM's active concealment of the hidden fees (58 EBC 1201).
Although the circuit courts have disagreed about the scope of the fraud or concealment exception—with U.S. Court of Appeals for the District of Columbia Circuit holding that a defendant must have actively engaged in concealment for the exception to apply, and the U.S. Court of Appeals for the Second Circuit applying the exception when the underlying breach involved fraud—the Sixth Circuit declined to wade into the dispute in Hi-Lex, instead finding that BCBSM's actions implicated the fraud or concealment exception under either test.
In June 2011, Hi-Lex Controls Inc. filed suit against BCBSM, which served as the third-party administrator (TPA) for its health plan.
Hi-Lex alleged that the insurer breached its ERISA fiduciary duties by imposing hidden administrative fees and mark-ups beginning in 1993. Hi-Lex alleged that it learned of these fees for the first time in a 2011 letter from BCBSM.
After determining that BCBSM was a plan fiduciary and considering the parties' statute of limitations arguments, the district court conducted a nine-day bench trial on Hi-Lex's fiduciary breach claim.
The district court ultimately awarded Hi-Lex about $5.1 million in damages, along with more than $900,000 in prejudgment interest (56 EBC 1047).
BCBSM appealed to the Sixth Circuit, and the Department of Labor filed an amicus brief asking the court to find that the statute of limitations for a fiduciary breach claim is tolled by a service provider's material omission regarding the fee amounts being charged to the plan.
Following the Sixth Circuit's ruling in favor of Hi-Lex, the district court declined to stay final judgment while the insurer appealed to the Supreme Court.
That ruling lifted a temporary stay issued in June and allowed the enforcement of a writ of garnishment against the bank accounts holding a $6.4 million bond that the insurer had posted pending its appeal of the district court's decision to the Sixth Circuit in June 2013.
In its petition for Supreme Court review, BCBSM posed the following question to the high court: “Whether, under the Employee Retirement Income Security Act of 1974 (‘ERISA'), a service provider that contracts with an employer to provide services to an ERISA plan exercises ‘control' over ‘plan assets' when the service provider (a) contracts with the employer for compensation for services provided to the plan, and (b) elects to exercise its contractual right to receive that compensation, rather than waiving that right.”
It also asked whether, “ under the plain language of section 408 of ERISA, a provider of services to an ERISA plan can be held to have violated section 406 of ERISA, which states that a fiduciary to an ERISA plan may not ‘deal with the assets of the plan in his own interest or for his own account,' when it has received only ‘reasonable compensation' for its services.”
The high court announced its opinion declining review Oct. 20.
BCBSM was represented by Constantine L. Trela Jr., Tacy F. Flint and Carter G. Phillips of Sidley Austin LLP, Chicago and Washington, and Rebecca D. O'Reilly of Bodman PLC, Detroit. Hi-Lex was represented by Stephen F. MacGuidwin and Aaron M. Phelps of Varnum LLP, Grand Rapids, Mich.
To contact the reporter on this story: Jacklyn Wille in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jo-el J. Meyer at email@example.com
Text of the Sixth Circuit's opinion is at http://www.bloomberglaw.com/public/document/HiLex_Controls_Inc_v_Blue_Cross_Blue_Shield_of_Mich_No_Nos_131773.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)