Opinion ID: 773412
Heading Depth: 2
Heading Rank: 1

Heading: Standard of Review of a Plan Administrator's Interpretations

Text: 26 ERISA was enacted to ensure that employer-provided benefit plans are safeguarded and maintained so as to be available to employees when they are due. The Act does not mandate that an employer provide benefits, and has nothing to say about how these plans are to be designed. See Nazay v. Miller, 949 F.2d 1323, 1329 (3d Cir. 1991). The Act does, however, ordinarily impose fiduciary duties upon plan administrators once a plan has been implemented. See Noorily v. Thomas & Betts Corp., 188 F.3d 153, 158 (3d Cir. 1999). 27 Administrators of ERISA plans may have various degrees of responsibility, depending on the plan's design. Some maybe charged simply with carrying out the plan according to its terms; others may have more discretionary authority to interpret the terms of the Plan and make benefits determinations. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 103 L. Ed. 2d 80, 109 S. Ct. 948 (1989). For many years, in cases in which beneficiaries sued administrators alleging that benefits had been wrongly denied them, courts attempted to set standards as to the degree to which they would defer to the decisions of the administrators who, by the design of the plan -- which the employer was completely free to set -- were charged with implementing it. 28 In Firestone Tire, the issue finally reached the Supreme Court. Firestone Tire had sold its plastics division to a new company, and the former employees, who had been rehired without interruption and at the same pay rates, sued Firestone for the benefits they had accrued under Firestone's termination pay plan. Firestone, which was also the administrator of the plan, denied the benefits on the ground that the sale to the new company did not constitute a triggering event within the terms of the plan requiring the payment of benefits. See id. at 105-06. In determining the appropriate standard of review to apply to Firestone's interpretation of its plan, the Supreme Court began by observing that ERISA abounds with the language and terminology of trust law. Id. at 110. The Court, particularly noting that ERISA requires that benefits plans have named fiduciaries and authorizes suits against them for breach of fiduciary duty, see id., analogized ERISA administrators to trustees, and explained that in setting a standard of review for an administrator's decision, it would follow ordinary principles of trust law, see id. at 111. 29 In the Court's view, under ERISA, an administrator is a fiduciary to the extent he exercises any discretionary authority or control. Id. at 113 (emphasis omitted). Under ordinary trust principles, the decisions of trustees who are granted discretionary authority to interpret the trust's terms receive only arbitrary and capricious review from courts. See id. at 111. Extending these principles to ERISA, the Court held that although the decisions of these fiduciaries of ERISA plans would receive deferential review from courts, administrators who were not granted discretionary authority to construe a plan's terms would receive no deference, and their decisions would be reviewed in accordance with ordinary contract principles. See id. at 111-15. The Court also left open the possibility that ERISA fiduciaries operating under a conflict of interest would receive less deferential review. See id. at 115. Under our decision in Pinto v. Reliance Standard Life Insurance Co., 214 F.3d 377 (3d Cir. 2000), a court will apply heightened scrutiny to an administrator's determination either when the plan, by its very design, creates a special danger of a conflict of interest, or when the beneficiary can point to evidence of specific facts calling the impartiality of the administrator into question. See id. at 383-87; see also Bill Gray Enters., Inc. Employee Health & Welfare Benefit Plan v. Gourley, 248 F.3d 206 (3d Cir. Apr. 26, 2001). 30 If J&J's Plan were an ordinary ERISA plan, then, given the broad discretion granted to the Pension Committee, we would apply the standards set forth in Firestone Tire and Pinto. We would first determine whether any conflict of interest existed for the Plan administrators, and then we would calibrate our standard of review for their benefits decision accordingly. Because Goldstein's claim for benefits would be paid entirely out of the Top Hat Plan and the funds would come directly from J&J's operating revenues, we perforce would consider these facts relevant in choosing our standard of review. See Pinto, 214 F.3d at 389. 31 However, a top hat plan is a unique animal under ERISA's provisions. These plans are intended to compensate only highly-paid executives, and the Department of Labor has expressed the view that such employees are in a strong bargaining position relative to their employers and thus do not require the same substantive protections that are necessary for other employees. See DOL Opin. Letter 90-14 A, 1990 WL 123933, at  (May 8, 1990). We have held that such plans are more akin to unilateral contracts than to the trust-like structure normally found in ERISA plans. See In re New Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996); Kemmerer v. ICI Americas Inc., 70 F.3d 281, 287 (3d Cir. 1995). Accordingly, top hat plans are not subject to any of ERISA's substantive provisions, including its requirements for vesting and funding. See 29 U.S.C. 1051(2); 1081(a)(3). Not only are the administrators of these plans not subject to ERISA's fiduciary requirements, see 29 U.S.C. 1101(a), but the top hat plan at issue in this case specifically exempts its administrators from any personal liability for actions taken with regard to the plan. 32 Given the unique nature of top hat plans, we believe the holding of Firestone Tire requiring deferential review for the discretionary decisions of administrators to be inapplicable. The deferential standard of review granted to plan administrators exercising discretionary authority was specifically an outgrowth of the Supreme Court's analogy to trust law, and particularly the fiduciary responsibilities possessed by administrators with discretionary authority. See Firestone Tire, 489 U.S. at 110-11. In contrast, a top hat administrator has no fiduciary responsibilities. Top hats are more analogous to the second scenario identified by the Supreme Court, i.e., when a plan administrator has no discretion to interpret the plan's terms (and thus is not a fiduciary), in which case the plan is reviewed de novo, according to the federal common law of contract. See id. at 112. That is, although, as was done in this case, discretion may be explicitly written into a top hat plan document, it does not act as a legal trigger altering the standard of review. Thus, we believe that, in accordance with our earlier precedent, top hat plans should be treated as unilateral contracts, and neither party's interpretation should be given precedence over the other's, except in accordance with ordinary contract principles. 6 33 In reaching this conclusion, we reject J&J's contention that, because ERISA's definitional section lists a fiduciary as one who exercises discretion in interpreting the terms of a plan, see 29 U.S.C. 1002(21)(a), administrators of top hat plans are also fiduciaries. To begin with, ERISA explicitly states that top hat plans are not subject to the ERISA's fiduciary requirements. See 29 U.S.C. 1101(a). Further, it is well established in the caselaw that there is no cause of action for breach of fiduciary duty involving a top hat plan. See In re New Valley Corp., 89 F.3d at 153; accord Demery v. Extebank Compensation Plan, 216 F.3d 283, 290 (2d Cir. 2000) (dismissing ERISA claims for breach of fiduciary duty in a top hat plan on the ground that top hat administrators are not bound by fiduciary standards); Duggan v. Hobbs, 99 F.3d 307, 313 (9th Cir. 1996) (same). Finally, we find J&J's argument disingenuous in light of the explicit terms of its own Plan absolving the administrators of the Top Hat Plan from individual liability. These terms, which designate the Pension Committee as administrator (but not fiduciary), stand in marked contrast to the parallel provisions of the Retirement Plan that explicitly name the same committee both as administrator and as fiduciary. 34 We acknowledge that our holding may appear to have the potential to create anomalous results. To begin with, many plans may be structured as the one currently before us, whereby benefits are calculated in a similar manner whether they are to be paid from an ordinary retirement plan or from a top hat plan. Different standards of review for each may result in different interpretations of a single plan's terms, even though on paper the two halves are designed to work in tandem and to yield identical results. Our holding may also seem anomalous in that we appear to be according the least deference to plan administrators when they are determining benefits of highly-paid employees, the very group that the Department of Labor believes is best able to protect its own interests. 35 However, we believe that these potentially anomalous results are not as severe as may appear at first blush. The deference ordinarily due an ERISA plan administrator is only available to the extent that the plan grants that administrator discretion to interpret the terms of the plan. See Firestone Tire, 489 U.S. at 111-13. In the absence of such discretion, a court will review the terms of the plan de novo. See id. Thus, the possibility for different standards of review between top hat plans and other ERISA plans will only arise when the plan has explicitly granted discretion to the plan administrators. But in the case of a top hat plan, even though an administrator may not receive deference under Firestone Tire, any grant of discretion must be read as part of the unilateral contract itself. As a term of the contract, it must be given effect as ordinary contract principles would require, thus minimizing the potential for differing standards of review for identical plan terms. 36 Ordinary contract principles require that, where one party is granted discretion under the terms of the contract, that discretion must be exercised in good faith -- a requirement that includes the duty to exercise the discretion reasonably. See Restatement (Second) of Contracts 205 & cmt a; see also Berger v. Edgewater Steel Co., 911 F.2d 911, 919 (3d Cir. 1990) (term of an ERISA retirement plan allowing early retirement when the Company considers that such retirement would . . . be in its interest obligates the employer to reach its decision in good faith). As with any other contract term, courts retain the authority to conduct a de novo review as to whether a party has complied with its good-faith obligations. 37 Goldstein argues that if the plan is a traditional contract, the clause granting interpretive discretion to J&J administrators should be voided as unconscionable for it is the functional equivalent of designating an interested party as an arbitrator. We do not agree. Contracts are often considered to be enforceable even when particular parties are able to specify terms in the course of dealing, subject only to the duty of good faith. See, e.g., O.N. Jonas Co., Inc. v. Badische Corp., 706 F.2d 1161 (11th Cir. 1983) (interpreting the Uniform Commercial Code); TCP Indus., Inc. v. Uniroyal, Inc., 661 F.2d 542 (6th Cir. 1981) (same). Goldstein has cited nothing to the contrary, and we do not consider cases involving due process rights to impartial arbitrators, such as United Retail & Wholesale Employees Teamsters Union Local No. 115 Pension Plan v. Yahn & McDonnell, Inc., 787 F.2d 128 (3d Cir. 1986), to be apposite to the issue at hand. Thus, we see nothing improper in Goldstein and J&J contracting to allow Goldstein to participate in a pension plan under which J&J will have responsibility to administer the plan and interpret ambiguous terms, so long as its interpretations are reasonable and it exercises its responsibilities in good faith. In fact, given that the Top Hat Plan was designed to work in concert with a retirement plan that has designated the same entity as the fiduciary (a perfectly legitimate design), the Top Hat Plan could hardly be administered effectively without granting J&J this discretion. 38