Opinion ID: 3029219
Heading Depth: 3
Heading Rank: 2

Heading: Scope of the Fiduciary Exception under ERISA

Text: In the early 1980s, federal courts began extending the principles of Garner and Riggs to apply against ERISA fiduciaries. First, in 1981, the fiduciary exception was used to render discoverable attorney-client communications by pension fund officials regarding the administration of the fund. 18 Donovan v. Fitzsimmons, 90 F.R.D. 583, 585 (N.D. Ill. 1981). The court relied on both Garner and Riggs to hold that, where beneficiaries sue their fiduciaries alleging breaches of fiduciary duty, the attorney-client privilege does not attach to legal advice rendered to the fiduciaries for assistance in the performance of fiduciary duties. Id. at 585-86. Most notably, the court recognized that the Garner rule might not apply in every fiduciary situation but found it applicable to the ERISA fiduciaries before it because of the strong parallels to the trustee situation in Riggs. Id. at 586. It is not surprising that the court found the analogy between trust law and ERISA to be apt; the Supreme Court has recognized that fiduciary duties under ERISA “draw much of their content from the common law of trusts, the law that governed most benefit plans before ERISA’s enactment.” Varity Corp. v. Howe, 516 U.S. 489, 496 (1996). The following year, another federal district court applied the fiduciary exception in an ERISA action. See WashingtonBaltimore Newspaper Guild, Local 35 v. The Washington Star Co., 543 F. Supp. 906 (D.D.C. 1982). For our purposes, the case is most significant for the broad, sweeping language with which the court asserted that “[w]hen an attorney advises a fiduciary about a matter dealing with the administration of an employees' benefit plan, the attorney's client is not the fiduciary personally but, rather, the trust's beneficiaries.” Id. at 909. On its face, this language suggests that the court’s holding applies to any ERISA fiduciary acting in its fiduciary capacity, regardless of whether the fiduciary is a plan administrator, trustee, or a limited-purpose statutory fiduciary. Such a reading 19 would be unjustified. The court’s analysis focused on the responsibilities of trustees; the defendants in that case were the trustees and the sponsor of an ERISA-regulated plan. The court simply did not consider whether the fiduciary exception applied with equal force to all ERISA fiduciaries, its broad language notwithstanding. Since Donovan and Washington Star were decided, many other courts have applied the fiduciary exception to ERISA fiduciaries. Just as the Riggs court recognized that the exception was premised on both the beneficiaries’ right to inspection and their identity as the “real” clients, courts applying the fiduciary exception to ERISA fiduciaries have cited these same rationales. See Mett, 178 F.3d at 1063. These courts also have recognized two types of situations in which the fiduciary exception does not apply. First, under the “liability exception,” a fiduciary, seeking the advice of counsel for its own personal defense in contemplation of adversarial proceedings against its beneficiaries, retains the attorney-client privilege. Mett, 178 F.3d at 1063-64; Riggs, 355 A.2d at 711. Second, under the “settlor exception,” courts distinguish between fiduciary acts and settlor acts, the former being discretionary acts of plan administration and the latter involving the adoption, modification, or termination of an employee benefit plan. See 29 U.S.C. § 1002(21)(A)(iii); Aetna, 542 U.S. at 220; Lockheed Corp. v. Spink, 517 U.S. 882, 891 (1996). The fiduciary exception does not apply to settlor acts because such acts are more akin to those of a non-fiduciary trust settlor than they are to those of a trustee. See Lockheed, 517 U.S. at 891; Bland, 401 F.3d at 787-88. 20 These two exceptions to the fiduciary exceptions share a common justification – both allow the attorney-client privilege to remain intact for an ERISA fiduciary when its interests diverge sufficiently from those of the beneficiaries that the justifications for the fiduciary exception no longer outweigh the policy underlying the attorney-client privilege. The beneficiaries are no longer the real clients, and disclosure of attorney-client communications is no longer an obligation. ERISA fiduciaries, however, come in many shapes and sizes, and we do not believe that the logic underlying the fiduciary exception applies equally to all. We conclude that the fiduciary exception does not apply to an insurer like HN-NJ and its corporate parents because the plaintiff-beneficiaries are not the “real” clients obtaining legal representation. In some respects, an insurer providing benefits to the beneficiaries of an ERISA-regulated plan is no differently situated than a plan administrator or an ERISA trustee. All are considered to be fiduciaries under ERISA, and all owe duties of loyalty and care to their beneficiaries. Because they are fiduciaries, they must act in furtherance of their beneficiaries’ interests. Nonetheless, significant differences exist between insurance company fiduciaries such as HN-NJ and other ERISA fiduciaries to whom the fiduciary exception has been applied.
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.
Even though we conclude that HN-NJ and its corporate parents are the sole and direct clients of their retained counsel, we must also consider a second rationale for applying the fiduciary exception – the fiduciary’s duty of disclosure. The obligation of a trustee to disclose to beneficiaries the advice of counsel retained by the trust has been recognized in each of three Restatements of Trusts. See R ESTATEMENT (F IRST) OF T RUSTS § 173 (1935); R ESTATEMENT (S ECOND) OF T RUSTS § 173 (1959); R ESTATEMENT (T HIRD) OF T RUSTS § 82 cmt. f (Tentative Draft No. 4, 2005). Some courts have used language broad enough to suggest that every ERISA fiduciary has an obligation to disclose counsel’s statements to its beneficiaries. E.g., LILCO, 129 F.3d at 271-72 (“An ERISA fiduciary has an obligation to provide full and accurate information to the plan beneficiaries regarding the administration of the plan.” (empasis added)); Washington Star, 543 F. Supp. at 909. We conclude that such broad language does not represent an intentional expansion of the fiduciary exception. Because fiduciary duties under ERISA “draw much of their content from the common law of trusts,” Varity, 516 U.S. at 496, it is appropriate to apply a trustee’s disclosure obligations to ERISA plan administrators who operate as trustees. When Congress 26 extended obligations under the common law of trusts to reach entities which had not been deemed to be trustees under the common law, however, Congress did not intend to expand the full panoply of trustees’ obligations to every entity which might be designated a fiduciary under ERISA. Specifically, Congress provided that the assets of an insurance company need not be held in trust. 29 U.S.C. § 1103(b)(1)-(2). For that reason, we do not believe that Congress intended to impose upon insurance companies doing business with ERISA-regulated plans the same disclosure obligations that have been imposed upon trustees at common law. Section 1103(b)(1)-(2) excepts insurers from trustee-like obligations; we see no reason to impose trustee-like disclosure obligations upon an entity excepted from ERISA’s analogy to trust. Thus, simply because an insurer has certain limited fiduciary obligations under ERISA, those obligations are not coextensive with the common law obligations of a trustee. We do not suggest that an insurer servicing an ERISA plan owes no disclosure obligations to plan beneficiaries. Indeed, under 29 U.S.C. § 1133(a), an insurer-fiduciary denying a claim for benefits must disclose the specific reasons for the denial. But we do conclude that the disclosure obligations of an insurer-fiduciary cannot be defined through rote application of the common law of trusts. Two additional factors convince us that Health Net’s disclosure obligations do not require it to reveal the advice it obtains from its own retained counsel. First, the fiduciary obligations of insurers who contract with ERISA plans are not well-settled at law. Definition of those obligations often will be one of the most hotly contested issues in a lawsuit. It would be 27 imprudent to craft an evidentiary privilege in such a way as to require the difficult task of defining fiduciary obligations to be met at the discovery stage. Moreover, when dealing with the attorney-client privilege, courts must be particularly careful not to craft rules that cause application of the privilege to turn on the answers to extremely difficult substantive legal questions. “An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.” Upjohn, 449 U.S. at 393. We are reluctant to ask lawyers to read tea leaves and predict how courts will resolve the imponderables of ERISA before they can take the most preliminary step of advising their clients as to whether their communications will remain confidential. We note a certain paradox inherent in any application of the fiduciary exception to an insurer which is acting as a fiduciary in deciding claims under an ERISA plan. The need for the attorney-client privilege is at its height where the law with which the client seeks to comply is complicated and the penalties for noncompliance are great. Cf. id. at 392 (noting that corporations have a strong need for confidential legal advice because of the complicated legal rules confronting them). ERISA is an enormously complicated statute. An entity’s ability to secure confidential legal advice should not be at its lowest when complex legal obligations are at their highest. Although this problem arises whenever the fiduciary exception applies to an ERISA fiduciary, its undesirability should counsel against overzealous extension of the exception. Second, an expansive and uncertain attorney-client privilege for insurer-fiduciaries will cause insurers to reevaluate 28 their relationships with ERISA plans. Some may choose to cease providing insurance for benefit plans altogether. Others may increase their charges for ERISA-regulated customers to reflect the added risk that they may lose their ability to obtain confidential legal advice. Perhaps others will simply decline to fully inform their attorneys of all relevant facts. None of these outcomes is desirable for ERISA beneficiaries. These concerns, of course, are merely variations of ones that have been rejected by courts regarding the fiduciary exception as applied to trustees, corporate managers, and ERISA plan administrators. They are, however, thumbs on the scale and help to tip the balance. We remind the parties that, although the fiduciary exception is not applicable here, not every communication between Health Net and its attorneys is necessarily privileged. Other limitations and exceptions to the attorney-client privilege still apply. For instance, the communications must be for legal, not business purposes. Moreover, even when attorney-client communications are privileged, the privilege runs only to the communications themselves, not the underlying information communicated. Upjohn, 449 U.S. at 395. Thus, our holding today forecloses only a means of discovering information; alternate paths of discovery are not closed.