As was set forth in our post of October 15, resolution of the critical “standard of review” issue is linked to the presence (or absence) of “magic” language in the plan — that is, language conferring upon the decision-maker discretion to determine benefit eligibility. If the “magic” language is present, then “arbitrary and capricious” review results; if not, then the review standard is “de novo.”

But even under circumstances where it is conceded that the plan contains language conferring discretionary authority, there are a handful of potential arguments for the court to pursue “de novo” review nonetheless.  One such argument, explored by the Second Circuit in Nichols v. Prudential Ins. Co. of Am., 406 F.3d 98 (2d Cir. 2005), comes into play when the benefit determination in focus did not come about as a result of an exercise of the decision-maker’s discretion (as where, for example, an ERISA appeal was denied by operation of law because the decision-maker never actually rendered a decision or because the decision came too late).  Another focuses on the fact that some jurisdictions have, by statute, rendered discretionary clauses unenforceable.  See, e.g., California Insurance Code 10110.6 (effective January 1, 2012).  Still another, highlighted in a recent District Court decision, is predicated on the common sense requirement that the entity responsible for the benefit determination and the entity vested with discretion must be one and the same.

In the case, discretionary authority was vested in First Unum Life Insurance Company (“First Unum”), but the individuals who actually made (and subsequently upheld) the adverse benefit determination were employees of Unum Group (a holding company of various subsidiaries, including First Unum). Deciding that the decision-makers were not agents of First Unum (because the “general service agreement” between First Unum and Unum Group defined Unum Group as an “independent contractor”), and that First Unum had not validly delegated its discretionary authority to Unum Group (because the power to delegate is not inherent, and no authority or procedure for doing so existed in the plan), the District Court held that “de novo” review was appropriate.

McDonnell v. First Unum Life Ins. Co., 2013 WL 3975941 (S.D.N.Y. Aug. 5, 2013)

In 2010, the Supreme Court clarified in Hardt v. Reliance Standard Life Ins. Co. that an ERISA litigant need not be a “prevailing party” in order to recover attorney’s fees; rather, to be eligible for an award of attorney’s fees, a party need only demonstrate that it achieved “some degree of success on the merits.” This standard is not met, said the Court, when a party achieves only “trivial success on the merits or a purely procedural victory.” It is satisfied, however, when a “court can fairly call the outcome of the litigation some success on the merits without conducting a lengthy inquiry into the question whether a particular party’s success was substantial or occurred on a central issue.”

Flash forward to September 2013, when the Second Circuit evaluated a District Court’s handling of an ERISA fee claim, ultimately concluding that the District Court failed to apply Hardt correctly. The case centered on a dispute over coverage for medical expenses incurred by the wife of an insured employee, with the insurer contending that the employee and his wife should not have been covered, that the subject policy should be rescinded and/or reformed to reflect the lack of coverage, and that it should be allowed to recover in “restitution” the funds that it had previously disbursed to the employee’s wife’s medical providers.

In its only decision on the merits, the District Court dismissed the insurer’s restitution claim, while denying summary relief to either side on the other claims. Thereafter, the claims were settled, leaving only the dispute over attorney’s fees. The District Court, purporting to follow Hardt, denied the application for fees, deeming the dismissal of the restitution claim merely “procedural,” and deciding that everything else that resulted was derivative of the parties’ voluntary settlement (which, according to the District Court, cannot be used to underpin a fee claim for lack of a “judicial imprimatur needed to qualify as litigation success”). The Second Circuit, however, disagreed, calling the demise of the insurer’s restitution claim akin to a judgment on the merits, and also deeming the subsequent withdrawal of the remaining claims potentially a success in and of itself because, in the Second Circuit’s view, there exists a question of fact as to whether the withdrawal was precipitated by the District Court’s expressions of skeptism in relation to the insurer’s claims in general (which would bring it in-line with so-called “catalyst theory”).

Scarangella v. Group Health, Inc., 731 F.3d 146 (2d Cir. 2013)