Opinion ID: 3011361
Heading Depth: 1
Heading Rank: 5

Heading: What Standard of Review?

Text: The question remains, then, what should be the higher standard of review? This secondary question is distinct from the first: even those courts that find that there is no conflict in the insurance company context have struggled with how to incorporate a conflict--when theyfind one-- _________________________________________________________________ 7. See Nolen v. Paul Revere Life Ins. Co., 32 F. Supp. 2d 211, 216 (E.D. Pa. 1998) (the dual role requires a heightened standard); Morris v. Paul Revere Ins. Group, 986 F. Supp. 872, 881-82 (D.N.J. 1997) (same); Rizzo v. Paul Revere Ins. Group, 925 F. Supp. 302, 309 (D.N.J. 1996) (same), aff 'd, 111 F.3d 127 (3d Cir. 1997); Nave v. Fortis Bens. Ins. Co., No. 98- 3960, 1999 U.S. Dist. LEXIS 13382 (E.D.Pa. Aug. 25, 1999) (Fortis's dual role as the Plan's claims administrator and as the insurance company which insures the benefits provided under the Plan certainly creates a genuine or substantial conflict of interest.); Landau v. Reliance Std. Life Ins. Co., No. 98-903, 1999 U.S. Dist. LEXIS 3673 (E.D. Pa. Jan. 13, 1999) (following Brown); Sciarra v. Reliance Standard Life Ins. Co., No. 97-1363, 1998 U.S. Dist. LEXIS 13786 (E.D. Pa. Aug. 26, 1998) ([Defendant's] dual role as administrator and insurer of its own plan creates a conflict between its providing benefits to claimants and its own financial status); Perri v. Reliance Standard Life Ins. Co., No. 97-1369, 1997 U.S. Dist. LEXIS 12741 (E.D. Pa. Aug. 19, 1997) (Reliance Standard's dual role as administrator and insurer of its own plan creates a conflict between its providing benefits to claimants and its own financial status.); cf. Marques v. Reliance Std. Life Ins. Co., 1999 U.S. Dist. LEXIS 17406 (E.D. Pa. Nov. 1, 1999) ([T]his Court finds it hard to believe that there is not a conflict of interest when the defendant makes benefit decisions and pays for benefits out of its own assets.). 23 into the framework of arbitrary and capricious review mandated by Firestone. In Kotrosits v. GATX Corp. Noncontributory Pension Plan for Salaried Employees, 970 F.2d 1165, 1173 (3d Cir. 1992) we stated that had a conflict existed, Firestone counsels in favor of withholding deference. This suggests de novo review. On the other hand, in Abnathya v. Hoffman-LaRoche, Inc., 2 F.3d 40, 45 n.5 (3d Cir. 1993) we suggested that the circumstances might require special attention or a more stringent standard of review under Firestone. Again, we turn to the other circuits, where we find three methods of dealing with a conflict: burden shifting, de novo review, and the sliding scale. We begin with Brown v. Blue Cross & Blue Shield of Ala., 898 F.2d 1556 (11th Cir. 1990), in which the Eleventh Circuit turned to the common law of trusts to determine the appropriate method for reviewing the conflicted discretionary decisions of an insurance company. See 898 F.2d at 1564. It concluded that while an uninterested fiduciary should receive a great deal of deference, common law trust cases dictated that the highly conflicted one should not; even potentially conflicted decisions were closely scrutinized, in part to protect the particular beneficiaries in a given case, and in part to discourage arrangements where a conflict arises. Id. at 1565. The court determined that a beneficiary need only show a substantial structural conflict of interest in order to shift the burden to the fiduciary to demonstrate that the conflict did not infect a benefits denial. See id. at 1566. It announced the following rule: [W]hen a plan beneficiary demonstrates a substantial conflict of interest on the part of the fiduciary responsible for benefits determinations, the burden shifts to the fiduciary to prove that its interpretation of plan provision committed to its discretion was not tainted by self-interest. That is, a wrong but apparently reasonable interpretation is arbitrary and capricious if it advances the conflicting interest of the fiduciary at the expense of the affected beneficiary or beneficiaries unless the fiduciary justifies the interpretation on the ground of its benefit to the class of all participants and beneficiaries. 24 Id. at 1566-67. To be sure, as a preliminary matter, the court mustfirst determine that the fiduciary's decision was  `wrong' from the perspective of de novo review. Id. at 1567 n.12. But once shifted, the task of justifying the interpretation is by no means insurmountable. If the fiduciary can demonstrate a routine practice or give other plausible justifications-- such as the interests of other beneficiaries--deference may be granted. Even a conflicted fiduciary should receive deference when it demonstrates that it is exercising discretion among choices which reasonably may be considered to be in the interests of the participants and beneficiaries. Brown, 898 F.2d at 1568. The kind of justification that is given as an example is an assertion, supported by evidence, that an insurance company's interpretation of its policy is calculated to maximize the benefits available to plan participants and beneficiaries at a cost that the plan sponsor can afford (or will pay). Id. The legitimacy of such an assertion should be ascertained by looking to, among other things, the consistency of the practice, the reasonableness of the reading (in that case, interpreting a term), and the internal consistency of the plan with the proferred reading. See id. The essence of the Eleventh Circuit's approach is that the fiduciary should be accorded deference, but only when deciding between options which are all in the best interest of the beneficiary or beneficiaries. Insurance companies, unlike the typical trustees, may be viewed with some skepticism because of the primacy of their profit-making function. Therefore, given the structural conflict, the administrator of an insurance company funding an ERISA plan has the burden of proving that beneficiary interests motivated a decision which would be wrong under de novo review. See id. A version of the Brown approach has been followed by several panels of the Ninth Circuit. See, e.g., Atwood v. Newmont Gold Co., Inc., 45 F.3d 1317, 1322 (9th Cir. 1995) (given material probative evidence of a conflict, the burden is shifted to the denying company to give a legitimate justification for a denial). The Second Circuit, while stringent in requiring particular evidence that a conflict infected the 25 decisionmaking process, uses de novo review once it credits such evidence. See Sullivan v. LTV Aerospace & Defense Co., 82 F.3d 1251, 1255-56 (2d Cir. 1996). Unlike the Eleventh Circuit, the test outlined in Sullivan does not include burden shifting. If the court finds that the administrator was in fact influenced by the conflict of interest, the deference otherwise accorded the administrator's decision drops away and the court interprets the plan de novo. Id. Other courts have rejected the shifting burden and either/or models, and instead use a sliding scale approach, according different degrees of deference depending on the apparent seriousness of the conflict. According to the Fourth Circuit, the fiduciary decision will be entitled to some deference, but this deference will be lessened to the degree necessary to neutralize any untoward influence resulting from the conflict. Doe v. Group Hospitalization & Medical Services, 3 F.3d 80, 87 (4th Cir. 1993). Despite this divergence from the Eleventh Circuit's burden shifting, we read the Doe court as engaging in a highly demanding exercise when it applies this sliding scale, review[ing] the merits of the interpretation to determine whether it is consistent with an exercise of discretion by a fiduciary acting free of the interests that conflict with those of the beneficiaries. Id. The Fourth Circuit's sliding scale approach has been adopted by several other courts. See Vega v. National Life Ins. Service, Inc., 188 F.3d 287, 296 (5th Cir. 1999) (en banc) (using the sliding scale approach); Chambers v. Family Health Plan Corp., 100 F.3d 818 (10th Cir. 1996) ([T]he arbitrary and capricious standard is sufficiently flexible to allow a reviewing court to adjust for the circumstances alleged, such as trustee bias in favor of a third-party or self-dealing by the trustee.); Miller v. Metropolitan Life Ins. Co., 925 F.2d 979, 984 (6th Cir. 1991) (the arbitrary and capricious standard is shaped by the circumstances when there is a conflict of interest). Despite a feint in the direction of adopting the Brown approach, see Armstrong v. Aetna Life Ins. Co., 128 F.3d 1263, 1265 (8th Cir. 1997) (holding that the perpetual conflict which exists when an insurer administers benefits from its own plan 26 warrants a de novo standard of review), the Eighth Circuit has settled on the sliding scale. See Woo v. Deluxe Corp., 144 F. 3d 1157, 1165 (8th Cir. 1998) (explicitly adopting sliding scale). The First Circuit uses something like the sliding scale, testing a decision by measuring its reasonableness in the context it was made, which necessarily includes an awareness of the effects of the decision on the parties. Doe v. Travelers Ins. Co., 167 F.3d 53, 57 (1st Cir. 1999). Reasonableness, notes that court, has substantial bite itself. Id. We adopt the approach of the sliding scale cases. That approach allows each case to be examined on its facts. The court may take into account the sophistication of the parties, the information accessible to the parties, and the exact financial arrangement between the insurer and the company. For example, a court can consider whether the insurance contract is fixed for a term of years or changes annually, and whether the fee paid by the company is modified if there are especially large outlays of capital by the insurer. Another factor to be considered is the current status of the fiduciary. Our previous cases, discussed supra Section II.F, which hold that an employer fiduciary is not conflicted generally assume that the company is stable and will act as a repeat player: The presumed desire to maintain employee satisfaction is based on this premise. When companies are breaking up, or laying off a significant percentage of their employees, or moving all their operations, these incentives diminish significantly. See Langbein, supra note 2, at 216 (The employer's reputational interest is not likely to be effective when the long term relationship between the firm and the workers is dissolving, as in a plant closing or in a corporate restructuring.). Furthermore, the sliding scale approach better adheres to Firestone's dictate that a conflict should be considered as a factor in applying the arbitrary and capricious standard. 489 U.S. at 115. Following Firestone to the Restatement of Trusts would counsel that a conflict of interest requires tighter review, but not necessarily a shifted burden, when the fiduciary is conflicted. In the determination of the question whether the trustee in the exercise of a power is 27 acting from an improper motive the fact that the trustee has an interest conflicting with that of the beneficiary is to be considered. Restatement (Second) of Trusts S 187, cmt. g (emphasis added). Comment (d) lists several factors, including conflict of financial interest, to examine whether there is an abuse of discretion, stating that the factors may be relevant and including the existence or nonexistence of an interest in the trustee conflicting with that of the beneficiaries. We think the best way to consider these potentially relevant factors (in this case, the structural conflict of interest) is to use them to heighten our degree of scrutiny, without actually shifting the burden away from the plaintiff. We acknowledge that there is something intellectually unsatisfying, or at least discomfiting, in describing our review as a heightened arbitrary and capricious standard. The locution is somewhat awkward. The routine legal meaning of an arbitrary and capricious decision is that used, quite understandably, by the district court: a decision without reason, unsupported by substantial evidence or erroneous as a matter of law. Once the conflict becomes a factor however, it is not clear how the process required by the typical arbitrary and capricious review changes. Does there simply need to be more evidence supporting a decision, regardless of whether that evidence was relied upon? This is unsatisfying. Rather, once factors are introduced, arbitrary and capricious stops sounding like arbitrary and capricious and more like some form of intermediate scrutiny, which has no analogue in thisfield. As we have seen, other courts have reconciled the sliding scale and the arbitrary and capricious language from Firestone by essentially reformulating the arbitrary and capricious standard for ERISA law, concluding thatthe arbitrary and capricious standard may be a range, not a point. . . [it is] more penetrating the greater is the suspicion of partiality, less penetrating the smaller that suspicion is. Wildbur v. ARCO Chem. Co., 974 F.2d 631, 638 (5th Cir. 1992) (quoting Van Boxel v. Journal Co. Employees' Pension Trust, 836 F.2d 1048, 1052-53 (7th Cir. 1987)); Lowry v. Bankers Life & Casualty Retirement Plan, 871 F.2d 522, 525 n. 6 (5th Cir. 1989) (same). 28 While we also find this explanation wanting, we can find no better method to reconcile Firestone's dual commands than to apply the arbitrary and capricious standard, and integrate conflicts as factors in applying that standard, approximately calibrating the intensity of our review to the intensity of the conflict. While the approach of Professor Langbein, see supra note 2, and of the Eleventh Circuit would seem more compatible with the basic principles of trust law, and hence a better fit, only the Supreme Court can undo the legacy of Firestone. In sum, we adopt the sliding scale approach, and, accordingly, will expect district courts to consider the nature and degree of apparent conflicts with a view to shaping their arbitrary and capricious review of the benefits determinations of discretionary decisionmakers.