Supreme Court Affirms Broad Deference To ERISA Plan Administrators’ Decisions

On April 21, 2010, the U.S. Supreme Court ruled that “a single honest mistake in plan interpretation” does not justify “stripping the administrator of [an ERISA plan of] deference for subsequent related interpretations of the plan.” In Conkright v. Frommert, No. 08-810, the U.S. Supreme Court held in a 5-3 decision authored by Chief Justice Roberts that the lower courts should have allowed the administrator of the Xerox Pension Plan (the “Plan”) to interpret a disputed Plan provision even though the lower court found the Plan Administrator’s previous interpretation to be arbitrary and capricious. (Justice Sotomayor took no part in the case because she was a member of the Second Circuit when the case was decided by that court.)

The case involved claims by several employees who had left Xerox in the 1980’s, received lump-sum distributions of retirement benefits earned up to that point, and were later rehired and earned additional benefits under the Plan. The Plan provided for an offset of the prior accrued benefit, and the Administrator initially interpreted the Plan to call for an approach known as the “phantom account” method. This method reduced the respondent’s present benefits by the hypothetical growth that respondents’ past distributions would have experienced if the money had remained in Xerox’s investment funds. Respondent’s challenged this method under ERISA.

The district court granted summary judgment for the Plan, applying a deferential standard of review to the Plan Administrator’s interpretation as required by the Plan. The Second Circuit vacated and remanded the district court judgment, holding that the Plan Administrator’s interpretation was unreasonable. On remand, the district court did not apply a deferential standard of review, nor did it accept the Plan Administrator’s new approach to calculating the offset. Rather, it adopted the employees’ approach. The Second Circuit then affirmed, holding, in relevant part, that the district court correctly refused to apply a deferential standard on remand where the administrator had previously been found to have abused its discretion in applying the same Plan terms.

The Supreme Court majority rejected the Second Circuit’s decision. The Court looked to its precedent in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) and Metropolitan Life Ins. Co. v. Glenn, 128 S.Ct. 2343 (2008). The Supreme Court found the Second Circuit Court of Appeals’ “one-strike-and-you’re-out” approach has no basis in Firestone, which set out a broad standard of deference with no suggestion that it was susceptible to ad hoc exceptions. The Court further reasoned that after Glenn, even a Plan Administrator operating under a systemic conflict of interest is still entitled to deferential review; therefore, no reason existed to deprive an administrator who was merely mistaken of that authority and deference. The majority supported its conclusion by noting that allowing complex questions of ERISA interpretation to be first decided by the plan administrator would serve a number of important interests, including encouraging voluntary employee benefit plans and ensuring efficiency, predictability, and uniformity in their administration.

The Conkright decision is a positive development for ERISA plan sponsors and administrators. It will have a direct and significant impact in cases where a court overturns an administrator’s application of a plan provision and either remands the matter to the administrator for further review, or the administrator proffers a different interpretation when the benefit determination is challenged in court. The decision will have an impact in other situations as well. It reinforces that plaintiffs must exhaust intra-plan administrative remedies before filing suit, despite oft-made arguments that the outcome of the process is a foregone conclusion and that exhaustion is therefore futile. In addition, Conkright appears to once again reflect a view on the part of the Supreme Court that complex matters of ERISA plan interpretation and implementation are best left to expert plan administrators, rather than being decided by courts.

If you have questions about the Conkright decision, please contact your Seyfarth Shaw employee benefits or ERISA litigation attorney or any attorney in the ERISA/Employee Benefits Litigation Practice Group.