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Judicial Review of Denial of Benefits

David Johanson

October 2000

Sixth Circuit Confirms That Arbitrary and Capricious Rather Than De Novo Standard of Review Is Appropriate When Reviewing Denial of Benefits If Plan Gives Administrator or Fiduciary Discretionary Authority to Determine Eligibility or to Construe Terms of the Plan.

In Becker v. Midwest Stamping & Manufacturing Company Profit Sharing Plan and Trust Administrative Committee, on July 12, 2000, the U.S. Court of Appeals for the Sixth Circuit affirmed the district court's summary judgment in connection with a claim for benefits under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), holding that the district court properly applied an arbitrary and capricious standard of review to an administrative committee's decision to deny a claim for benefits under ERISA and that the administrative committee's interpretation of the plan for purposes of the claim was not arbitrary and capricious.

The circumstances of this case involved a group of employees who terminated their employment with Midwest Stamping & Manufacturing Company ("Midwest Stamping") on March 22, 1993 (the "Plaintiffs"), the same day that Midwest Stamping merged out of existence with another company. The Midwest Stamping ESOP received cash and some preferred stock on the effective date of the merger. The companies established an escrow account of about $6.0M to cover certain pending and/or potential Midwest Stamping liabilities. On November 11, 1994, the Plaintiffs signed an election form in which they agreed to accept a lump sum cash distribution of their account balances, and by which they waived any further payment obligation from the Midwest Stamping Profit Sharing Plan (the successor plan to the Midwest Stamping ESOP). Subsequently, the Midwest Stamping Profit Sharing Plan's administrative committee did not allocate any of the escrow account (which they allocated as earnings) to the Plaintiffs. The Plaintiffs participated in the claims review process for the plan and the administrative committee twice denied the Plaintiffs' claims for a portion of the escrow account. The Plaintiffs then filed suit and litigation ensued.

The district court entered summary judgment in favor of the administrative committee. The Sixth Circuit reviewed the district court's summary judgment using a de novo standard. As to the question of the proper standard to be applied by the district court in reviewing the administrative committee's denial of the Plaintiffs' ERISA claims, the Sixth Circuit held that the district court properly reviewed such denial under the least demanding form of judicial review, the arbitrary and capricious standard, because the Midwest Stamping Profit Sharing Plan expressly granted to the administrative committee "authority to interpret and construe the provisions of the Plan and Trust." Citing Firestone v. Bruch (U.S. Supreme Court 1989).

The Sixth Circuit then concluded that when applying the deferential arbitrary and capricious standard of review, the district court must decide whether the administrative committee's claim denial was "rational in light of the plan's provisions." The Sixth Circuit then further concluded that the Plaintiffs and the administrative committee both offered two reasonable interpretations of the plan provisions in question (i.e., whether the Plaintiffs were "participants" and entitled to an allocation of a portion of the escrow account) and that "when two reasonable interpretations are offered, under the arbitrary and capricious standard of review, we must defer to the Plan administrator's interpretation."

This decision is significant and has a number of practical applications for ESOP companies and their employees and for qualified retirement plan sponsors and their employee participants generally, including the following: First, qualified retirement plan sponsors should include provisions that expressly grant to the plan administrator or fiduciary "authority to interpret and construe the provisions" of the governing plan documents. This will ensure that an arbitrary and capricious rather than a de novo standard of review is applied by the courts in the event of litigation to the decisions that are made by the plan administrator or fiduciary. This will help to discourage unfounded litigation and to truncate the time consuming and otherwise costly litigation process. Second, plan administrators and fiduciaries should respond to claims by participants by making rational determinations in light of the plan provisions regarding eligibility and benefit claims. This also will help to minimize the amount of time and expense involved in handling benefit claims.

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