Opinion ID: 3029219
Heading Depth: 4
Heading Rank: 1

Heading: Identity of the Client

Text: The first significant difference is the identity of the entity for whom the legal advice is given. When a contractual service provider such as HN-NJ obtains legal advice regarding the 21 execution of its fiduciary obligations, the beneficiaries of the customer benefit plans are not the “real” clients. We look to four factors in reaching this conclusion. The first is the ownership of the assets. In situations in which the fiduciary exception traditionally has been applied, the fiduciary is managing assets over which it lacks ownership rights. For instance, a trustee, by definition, manages a trust res it does not own; because the trust separates ownership from management, the trustee can have no legitimate personal interest in the trust’s funds or its management. See Riggs, 355 A.2d at 711. Similarly, a corporate manager manages assets owned by the shareholders of the corporation.3 In contrast, although ERISA typically requires that plan assets be held in trust, 29 U.S.C. § 1103(a), this requirement is excepted for insurance companies providing insurance contracts. 29 U.S.C. § 1103(b)(1)-(2). Although HN-NJ’s disposition of its assets may be limited by its contractual and statutory obligations, legal title to the assets nonetheless remains with HN-NJ. This convergence of management and ownership places an insurer like HN-NJ in a different position than other ERISA fiduciaries to whom the fiduciary exception has been applied, and demonstrates that HNNJ has a substantial and legitimate interest in the management of its assets – even while it engages in fiduciary acts. Second, our Court has recognized that when an insurance 3 A corporate manager may be a shareholder of the same corporation whose assets it manages. That such a manager may wear two hats does not change the fact that the hats it wears are legally distinct. 22 company, pursuant to a contract with an employer or benefit plan, determines eligibility for benefits and pays those benefits from its own funds, a structural conflict of interests arises. In this situation, “the fund from which monies are paid is the same fund from which the insurance company reaps its profits. This is in contrast to the actuarially determined benefit funds typically maintained by employers (especially in the pension area) that usually cannot be recouped by the employer or directly redound to its benefit.” Pinto v. Reliance Standard Life Ins. Co., 214 F.3d 377, 378-79 (3d Cir. 2000). Because of the conflict inherent in an insurer’s profit motive, we have held that when an insurer exercises discretionary authority over benefits, we will review its discretionary acts under a different, heightened standard of review than we will use to review the acts of other ERISA fiduciaries. See id. at 379. Although a structural conflict of interests increases the need for judicial scrutiny, it also undermines the argument that when an insurer retains counsel, the real clients being served are the beneficiaries. In Pinto, we adopted a sliding scale approach to reviewing fiduciaries’ discretionary acts, under which we increase our scrutiny as the fiduciary’s conflicts increase. Id. at 392. Inversely, as a fiduciary’s conflicts with its beneficiaries increase, the beneficiaries’ ability to claim that they are the real clients of counsel retained by the fiduciary must diminish. Although the presence of a conflict of interest, without more, may not be enough to render the fiduciary exception inapplicable, it is a factor that weighs in favor of retaining the 23 evidentiary privilege.4 Third, many insurers (including HN-NJ) face the additional conflict of handling multiple ERISA benefit plans at once, not to mention other, non-ERISA regulated customers. This situation is far different from that of a corporation whose shareholders have different interests because they hold different amounts or classes of stock. Cf. Garner, 430 F.2d at 1101. In the Garner situation, at least the corporate managers know that they owe their fiduciary obligations to a single, discrete group – the shareholders of the corporation. Similarly, although the trustee of a benefit plan must take care to ensure that all the plan’s beneficiaries receive the benefits which they are owed, 4 Health Net argues for a “mutuality of interests” requirement that would preclude application of the fiduciary exception where the interests of the fiduciary and the beneficiaries diverge. Complete mutuality is not a requirement for the fiduciary exception to apply. As early as Garner, courts have recognized that the relevant shareholders or beneficiaries may have interests so divergent that the fiduciary cannot possibly align itself with every interest at once. 430 F.2d at 1101. Nonetheless, the Garner court allowed the fiduciary exception to apply in such a situation. We believe that conflicts of interests must be judged using a sliding scale on a case-by-case basis. This approach is consistent both with our approach to conflicts of interests in other contexts, see Pinto, 214 F.3d at 392, and with our obligation to evaluate evidentiary privileges using the common law method. See F EDERAL R ULE OF E VIDENCE 501; Upjohn, 449 U.S. at 396-97. 24 management of the overall trust is meant to be a conflict-free endeavor. An insurer such as HN-NJ, however, owes distinct duties to each of its customers, including various benefit plans and other entities. Even while acting as a loyal fiduciary to the beneficiaries of one plan, HN-NJ must be mindful of the duties it owes to the beneficiaries of other customer plans, all of whom are paid from the same pool of assets. Again, we see that HNNJ and the Health Net companies have interests larger and distinct from those of its beneficiaries. Finally, we note that HN-NJ and its parent companies paid for legal advice using their own assets, not those of their beneficiaries. Courts have noted that when a trustee pays counsel out of trust funds, rather than out of its own pocket, the payment scheme is strongly indicative of the beneficiaries’ status as the true clients. E.g., Riggs, 355 A.2d at 712 (“[T]he payment to the law firm out of the trust assets is a significant factor, not only in weighing ultimately whether the beneficiaries ought to have access to the document, but also it is in itself a strong indication of precisely who the real clients were.”). Conversely, when a fiduciary obtains legal advice using its own funds, the payment scheme is an indicator (albeit only an indicator) that the fiduciary is the client, not a representative. Together, these four factors – unity of ownership and management, conflicting interests regarding profits, conflicting fiduciary obligations, and payment of counsel with the fiduciary’s own funds – indicate that an insurer which sells insurance contracts to ERISA-regulated benefit plans is itself the sole and direct client of counsel retained by the insurer, not the mere representative of client-beneficiaries, and not a joint client 25 with its beneficiaries. Were the insurer’s counsel to also represent the beneficiaries who seek to maximize their benefit payments, that counsel would face a direct conflict of interest under any standard of legal ethics. It would be odd indeed if ERISA were to force lawyers into precisely this conflicted role.