The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By D. Michael Reilly
Lane Powell PC, Seattle, WA
Does an arbitrary and capricious denial of ERISA governed disability benefits create a right to disgorgement of profits? NO.
The Sixth Circuit helps clarify the point in Rochow v. LINA, 780 F.3d 364 (6th Cir. 2015) (En banc decision reverses trial court decision ordering about $3 million disgorgement of profits for arbitrary/capricious denial of disability benefits.)
FACTS. Rochow sued LINA claiming it had wrongfully denied ERISA-governed disability benefits. After the district court held that the denial of benefits was arbitrary and capricious, and entered judgment in 2005, LINA appealed. The Sixth Circuit affirmed the decision in 2007. 482 F.3d 860 (6th Cir. 2007). Plaintiff then moved for an equitable accounting and disgorgement of profits. The district court granted that motion, and ordered LINA to disgorge about $3 million in profits it made on the benefits withheld. LINA appealed, again. This time a divided panel affirmed the disgorgement decision by the trial court. 737 F.3d 415 (6th Cir. 2013). The court granted LINA's petition for rehearing en banc.
ISSUE: Is Rochow entitled to recover about $3 million in disgorgement of profits for LINA's arbitrary and capricious denial of long-term disability benefits?
Sixth Circuit HELD: NO. (Majority 9 judges, Dissent 6 judges).
1. The majority decision assumed that the trial court concluded that LINA had breached its fiduciary duty by arbitrarily and capriciously denying benefits. Op. at 6
2. The majority held that Rochow was made whole under ERISA §502(a)(1)(B) through recovery of his disability benefits and attorney's fees, and potential recovery of prejudgment interest. Op. at 9, 10
3. Allowing Rochow to recover disgorged profits under ERISA §502(a)(3) would result in impermissible duplicative recovery. Op. at 10.
4. The Supreme Court has established that "`where Congress elsewhere provided adequate relief for a beneficiary's injury, there will likely be no need for further equitable relief, in which case such relief normally would not be appropriate.'" Op. at 8. (emphasis in original).
5. There is no cited "case that allowed disgorgement of profits under [ERISA] 502(a)(3) after the claimant recovered for wrongful denial of benefits under [ERISA] 502(a)(1)(B)." Op. at 9.
6. Citing Supreme Court precedent, the majority opinion reiterates: equitable relief is available only for injuries caused by violations that §502 does not elsewhere adequately remedy. Op. at 8.
7. The underlying decision incorrectly presented a new measure of damages that would apply virtually every time a court decided benefits were denied on an arbitrary and capricious basis. This would be plainly beyond and inconsistent with ERISA's purpose to make claimants whole. Op. at 9.
8. The court remanded the matter to the district court to consider whether Rochow is entitled to prejudgment interest, cautioning that any interest awarded cannot be "at a rate so high that the award amounts to punitive damages." Op. at 14.
9. The dissent held that breach of fiduciary duty is a separate claim that by definition results in a distinct injury, and therefore supports a distinct remedy. Op. at 27.
KEY TAKE AWAY: With a deep split in the opinions, and vigorous argument on both sides, one should expect to see the disgorgement theory asserted in other cases. The better argument is the one presented by the majority, but there are arguments to make, as shown by the dissent.
For more information, in the Tax Management Portfolios, see Wagner, 374 T.M., ERISA — Litigation, Procedure, Preemption and Other Title I Issues, and in Tax Practice Series, see ¶5590, Other Laws and Considerations Affecting Employee Benefit Plans.
© 2015 Lane Powell PC.
Copyright©2015 by The Bureau of National Affairs, Inc.
Notify me when updates are available (No standing order will be created).
Put me on standing order
Notify me when new releases are available (no standing order will be created)