Employment law perspectives: Sixth Circuit upholds disgorgement of profits and expands scope of ERISA remedies for wrongful claim denials
At its core, ERISA is a remedial statute. Generally, the purpose of ERISA is to make claimants whole, not to give them a windfall. Under previous U.S. Supreme Court and Sixth Circuit precedent, a claimant could not obtain both an award under Section 502(a)(1)(B) for a benefit claim, and an award under Section 502(a)(3) for the same injury. On December 6, 2013, the Sixth Circuit in Rochow v. Life Insurance Company of North America changed that legal landscape in a decision that could significantly change how ERISA benefits cases are litigated; from cases which are typically decided on dispositive motions based on a written record to complex accounting cases with substantial discovery.
In Rochow, the Sixth Circuit affirmed a lower court’s ruling, holding that an insurance company that incorrectly denied disability benefits had to pay the benefits and disgorge the profits earned on those benefits. The Sixth Circuit has dramatically expanded the scope of ERISA remedies available to plaintiffs appealing wrongful claim denials in a decision apparently contrary to the Supreme Court’s decision in Varity Corp. v. Howe, 516 U.S. 489 (1996), and to subsequent Sixth Circuit decisions interpreting Varity Corp.
Plaintiff, Daniel Rochow, applied for long-term disability benefits under his company’s disability plan. The insurer, Life Insurance Company of North America (“LINA”), denied his claim, as well as subsequent appeals. He sued LINA alleging two claims under Section 502(a) of ERISA: (1) that he was entitled to recover full benefits payable to him under the terms of the plan, and (2) that the insurer had breached its fiduciary duty in denying his benefits. Rochow asserted that LINA should disgorge all profits earned on the benefits wrongfully withheld to prevent the insurer’s unjust enrichment from the alleged breach of fiduciary duty.
The lower court found that LINA’s denial of benefits was arbitrary and capricious, and ordered the insurer to pay Rochow approximately $900,000 in wrongfully denied benefits. Then the district court awarded him an additional amount on the breach of fiduciary duty claim, $3,800,000, almost four times the benefits amount, by applying an analysis using LINA’s rate of return on equity. The court’s rationalized that because LINA breached its fiduciary duty, disgorgement was an appropriate remedy to prevent unjust enrichment. The court therefore made two awards for a denial of benefits: the 502(a)(1)(B) benefits, and 502(a)(3) equitable relief.
The Sixth Circuit (2-1) affirmed and upheld the lower court’s disgorgement ruling, finding that the two remedial provisions of Section 502(a) in question (the right to sue for wrongfully denied benefits and the right to sue for “other appropriate equitable relief”) were not mutually exclusive and that damages could be awarded under both. The dissenting opinion of Judge McKeague characterized the majority’s ruling as “an unprecedented and extraordinary step to expand the scope of ERISA coverage” that is “contrary to clear Supreme Court and Sixth Circuit precedent” and “willfully blind to the negative repercussions that undoubtedly will ensue” – specifically, an increase in disgorgement claims where abuse of discretion can be argued, and the cost and complexity of litigating such claims.