On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil No. 82-3286.
Higginbotham, Becker, Circuit Judges and Dumbauld, District Judge.*fn*
Three classes of former salaried employees of the Plastics Division of defendant Firestone Tire & Rubber Co ("Firestone") allege that the administrator of Firestone's pension and welfare plans improperly denied them various benefits allegedly due under those plans. The "rub" is that the plan administrator is Firestone itself -- which is also the sole source of funding for the plan at issue in Count I. To evaluate plaintiffs' claims we must address important questions about the scope of judicial review of decisions by pension plan administrators on plan participants' claims for benefits.
Proceeding individually, the named plaintiffs also contend that the plan administrator did not respond properly to their requests for information. In Count VII of their complaint, these plaintiffs invoke the statutory remedy for that wrong provided in § 502(c) of ERISA, 29 U.S.C. § 1132(c), and ask the court to order defendants to pay each named plaintiff damages of $100 per day.
After concluding that the plan administrator's decision to deny benefits should be reviewed under the deferential arbitrary and capricious standard, the district court granted summary judgment for defendants on all of the counts now before us. We affirm that decision with respect to Counts III and V, but reverse with respect to Counts I and VII.
With regard to Count I, we hold that the decision by Firestone to deny benefits under the Termination Pay plan should be reviewed de novo by the court and that there should be deference to neither the plan administrator's nor the participants' construction of plan terminology. We accordingly remand so that the district court can decide the proper construction of the relevant plan language.
With regard to Count VII, we hold that an individual has standing to request damages pursuant to § 502(c) of ERISA even is he is no longer an employee and is not entitled to any benefits other than those he has already received when he requested information under that provision. Section 502(c) confers wide discretion on the district court, however, to determine how much the claimant should receive in damages. We remand Count VII to permit the district court to exercise that discretion.
I. BACKGROUND FACTS AND STATEMENT OF CONTENTIONS
The three plaintiff classes consist of a total of over 500 former salaried employees of the Plastics Division of defendant Firestone Tire & Rubber Co. When Firestone sold its Plastics Division to the Occidental Petroleum Corporation on November 30, 1980, "most if not all" of the class members were offered the opportunity to continue in the positions they had occupied under Firestone. Most accepted. Firestone maintained three welfare or pension plans which are relevant for present purposes.
First, under the Termination Pay plan Firestone provided severance pay to salaried employees under certain conditions discussed in detail below. After the sale of the Plastics Division, plaintiffs requested benefits pursuant to that plan but Firestone denied them. Plaintiffs challenge that denial in Count I.
Second, under the Retirement Plan, Firestone offered defined retirement benefits if employees retired at age 65; it offered other somewhat smaller benefits if employees took early retirement, which they could do under certain limited circumstances. The Retirement Plan also offered deferred vested benefits, which were smaller than either the regular or the early retirement benefit, to employees who could not meet the conditions for either regular or early retirement but who could meet other less stringent conditions. After the sale of the Plastics Division plaintiffs sought early retirement benefits, but Firestone denied their claims and awarded only the lesser deferred vested benefit. Plaintiffs challenge this decision in Count III.
Firestone also maintained a Stock Purchase Plan, under which one class of plaintiffs had been accumulating stock. When Firestone sold the Plastics Division some of these class members' accumulated stock rights had not vested pursuant to the Plan. In Count V, plaintiffs contend that the sale of the Plastics Division was a partial termination under ERISA, 26 U.S.C. § 411(d)(3), automatically vesting their rights under the Plan on the date of the sale.
Finally, after the sale several of the named plaintiffs wrote to Firestone to request information about their benefits under each of the above plans. Plaintiffs contend that Firestone failed to respond properly to these requests, as required by section 502 of ERISA.*fn1 That provision also gives participants and beneficiaries a private right of action for damages against the plan administrator if the administrator does not fulfill his § 502(c) obligations. The named plaintiffs who sought information press that right of action in Count VII.
The district court granted summary judgment for defendants on all of the above claims. The court also dismissed several other counts, but plaintiffs do not appeal these decisions.*fn2
At the heart of the district court's opinion granting summary judgment on Counts I, III and V was the court's deference to decisions by the plan administrator. In each case the administrator based its denial of claims on a construction of plan language. The district court believed that it could not reverse the administrators' constructions of the plans' terms unless they were arbitrary and capricious, and it felt obliged to uphold the administrator's decisions given that standard of review.
At the core of the plaintiffs' challenge to the district court's decision is their contention that the district court should not have applied the arbitrary and capricious standard in this case. We now address that contention.*fn3
A. Plaintiffs' Contentions
Plaintiffs argue that both the common law of trusts and federal common law developed pursuant to ERISA counsel against deferring to decisions by fiduciaries with interests adverse to those of the claimants. Such a conflict can occur, for example, if the employer is the plan administrator and the plan provides that the employer's contributions in a given year are determined by the cost of satisfying plan liabilities in the prior year. Or, as in this case with respect to Count I, a conflict of interest may occur if the plan administrator is also the employer and the plan is unfunded, so that any benefits provided by the plan are paid directly by the employer out of its general corporate funds.
Plaintiffs advance two arguments to justify rejection of the arbitrary and capricious standard, and though these theories are based on different legal principles they produce essentially the same result. First, plaintiffs argue that the principles of trust law should control, that under trust law the plan administrators owes the employees a fiduciary duty, and that courts enforce that duty by construing all plan language "solely in the interest of the beneficiary." Plaintiffs argue further that the sole benefit standard requires courts to construe all ambiguities in plan language in favor of the beneficiaries, and in favor of coverage.
Alternatively, plaintiffs argue that contract law controls, that the welfare plan at issue in Count I is a unilateral contract drafted by defendant Firestone, and that the principles of contract law require that ambiguities be construed against the draftsman. The result under this theory is also to construe ambiguities regarding coverage in favor of the employee or former employee requesting benefits.
B. Current Law on the Scope of Review
The clear weight of authority under ERISA is against the plaintiffs' position. As defendants correctly note in their response to plaintiffs' argument, most courts of appeals have applied the arbitrary and capricious standard when considering challenges to plan administrators' denial of benefits. Kosty v. Lewis, 115 U.S. App. D.C. 343, 319 F.2d 744 (D.C. Cir. 1963); Miles v. New York State Teamsters Conference, 698 F.2d 593 (2d Cir. 1983); Holland v. Burlington Industries, 772 F.2d 1140 (4th Cir. 1985), affirmed men. as Brooks v. Burlington Industries, 477 U.S. 901,106 S. Ct. 3267, 91 L. Ed. 2d 559 , cert. denied as Slack v. Burlington Industries, 477 U.S. 903, 106 S. Ct. 3271, 91 L. Ed. 2d 562 (1986);*fn4 Dennard v. Richards Group, Inc. 681 F.2d 306, 314 (5th Cir. 1982); Varhola v. Doe, 820 F.2d 809 (6th Cir. 1987); Blakeman v. Mead Containers, 779 F.2d 1146 (6th Cir. 1985); Pabst Brewing Co. v. Anger, 784 F.2d 338 (8th Cir. 1986) (per curiam); Dockray v. Phelps Dodge Corp., 801 F.2d 1149 (9th Cir. 1986); Anderson v. Ciba-Geigy Corp., 759 F.2d 1518 (11th Cir. 1985).*fn5 Most of these courts -- though, as we discuss below, not all -- have applied this standard without stopping to ascertain whether the plan's funding obligations gave the plan administrator an interest adverse to the claimants with respect to the question whether benefits should be paid.
The arbitrary and capricious standard has not been applied unanimously, however, or without misgivings. First, recognizing the possibility that an interested decisionmaker's bias may prejudice him against the claimant and thereby deprive the claimant of an impartial hearing, this Court has explained in detail why it refused to defer to decisions made under ERISA by such fiduciaries.
In Struble v. New Jersey Brewery Employees' Welfare Trust Fund, 732 F.2d 325 (3d Cir. 1984), we declined to apply the arbitrary and capricious standard when reviewing a decision by plan administrators to return to the employers money which the employers has paid to fund a specified level of employee benefits. The beneficiaries alleged that if the trustees had fulfilled their duty to act "solely in the interest of the beneficiaries," ERISA § 404, 29 U.S.C. § 1104, they would have used the excess to purchase more benefits for the employees rather than returning the surplus to the employers. We held that when beneficiaries sue claiming that plan fiduciaries "have sacrificed the interests in the beneficiaries as a class in favor of some third party's interest," reviewing courts must "apply the strict statutory standards of ERISA" rather than "the more deferential 'arbitrary and capricious' standard." 732 F.2d at 333-34.*fn6
Second, even some courts that apply the label "arbitrary and capricious" to describe the scope of their review in fact subject plan administrators' decisions to more rigorous review than that normally accorded under the arbitrary and capricious standard under certain circumstances, especially when the plan administrator possesses an adverse interest. A line of cases in the Ninth Circuit provides one example. In Harm v. Bay Area Pipe Trades Pension Plan Trust Fund, 701 F.2d 1301, 1305 (9th Cir. 1983) (citations omitted), the court held that if a plan provision excludes a "disproportionate number" of participants from benefits, "the burden shifts to the trustees to show a reasonable purpose for the exclusion." Similarly, in Jung v. FMC Corp., 755 F.2d 708, 711-12 (9th Cir. 1985), the same court construed the arbitrary and capricious standard to provide:
Where, as here, the employer's denial of benefits to a class avoids a very considerable outlay [by the employer], the reviewing court should consider that fact in applying the arbitrary and capricious standard of review. Less deference should be given to the trustee's decision.
Finally, in Dockray v. Phelps Dodge Corp., 801 F.2d 1149, (9th Cir. 1986) the court defined the standard of review with great care, shaping it in response to "the countervailing tugs of divided loyalty pulling" at the plan administrator.
At the time that Administrator/Employee Benefits' Director McGowan denied Dockray's pension application [a] strike [against the employer] had entered its third month. The strike had been unusually bitter and violent. The Governor of Arizona had sent National Guardsmen to protect replacement workers as they crossed the lines of massed pickets outside the mine gates. Scuffles, property damage, vigilante violence, and numerous arrests had attracted national media attention to the dispute. For Dockray to "win" his pension would no doubt have boosted the strikers' morale at a time when Phelps Dodge had apparently succeeded in overcoming the picketing and had fully staffed the mine with replacement workers. Given this highly charged atmosphere, we think it unrealistic to grant the same substantial deference to the consideration of Dockray's application by an administrator who is also a senior member of Phelps Dodge management as we would to the decision of a wholly independent fund trustee in similar circumstances.
On remand, the burden of persuasion, of course, remains with Dockray. To prevail, Dockray must show that the Administrator breached his statutory fiduciary duty to act "for the sole and exclusive benefit" of the fund's beneficiaries, including Dockray. 29 U.S.C. § 186(c)(5). The court will weigh the Administrator's rebuttal of Dockray's evidence of bias against the arbitrary and capricious standard. However, the district court should be appreciably more critical of the reasons advanced by the Administrator, and less willing to resolve all ambiguities in the Administrator's favor, than the court would be if the fund were administered by an independent trustee.
801 F.2d at 1152-53 (footnote omitted).
Similarly, in Dennard v. Richards Group, Inc. 681 F.2d 306, 314 (5th Cir. 1982) the Fifth Circuit held that whether a plan administrator's interpretation of a term is arbitrary and capricious turns, inter alia, on the "legally correct" meaning of the term. The Fifth Circuit also emphasized that the facts of a particular case should influence the district court reviewing a plan administrator's decision. On remand, therefore, the district court was instructed to consider the "factual background of the determination by a plan and inferences of lack of good faith, if any." 681 F.2d at 314.
We believe that these cases reflect significant dissatisfaction with the arbitrary and capricious standard when the employer can profit from its decision to deny benefits. We also believe, however, that the propriety of the standard depends on the context in which it is used. In particular, we think it important to distinguish between the standard's use under some ERISA plans and its use in review of decisions made by trustees of plans established pursuant to § 302(c) of the Labor Management Relations Act, 29 U.S.C. § 186(c). We can explain this distinction best by tracing the development of the arbitrary and capricious standard. As the discussion in Part IC shows, the standard reached ERISA after is was adopted from the common law of trusts by courts construing the LMRA. The safeguards present in the LMRA distinguish that context from many administrative decisions made under ERISA and indicate that the standard should apply in only some ERISA contexts.
C. The Origin of the Arbitrary and Capricious Standard
The arbitrary and capricious standard governs judicial review of plan administrators' decisions in pension plans set up under § 302(c)(5) of the Labor Management Relations Act, 29 U.S.C. § 186(c)(5), see e.g., Wolf v. National Shopmen Pension Fund, 728 F.2d 182 (3d Cir. 1984), and courts appear to have imported the standard into ERISA by analogy to cases concerning LMRA plans. As we explained in Struble, 732 F.2d at 333:
The "arbitrary and capricious" standard derives from section 302(c)(5) of the LMRA. That section imposes a duty of loyalty on section 302 trustees by permitting employer contributions to a welfare trust fund only if the contributions are used "for the sole and exclusive benefit of the employees. . . ." Section 1104 of ERISA imposes a similar duty of loyalty, and not surprisingly the courts have applied the "arbitrary and capricious" standard under ERISA as well.
See, e.g., Music v. Western Conference of Teamsters Pension Trust Fund, 712 F.2d 413 (9th Cir. 1983). The LMRA cases, in turn, borrowed principles from the common law of trusts -- a body of law which also formed the basis for ERISA itself. We therefore begin our analysis with a brief review of the relevant trust law doctrines.
The paradigmatic common law trustee must act solely for the benefit of the beneficiaries. Restatement (Second) of Trusts § 170. If the settlor of the trust instructs that the trust assets be distributed among the beneficiaries, without prescribing the method for doing so, he perforce relies on the trustee's discretion to determine how the allocation should be made. Courts therefore respect the allocation decision unless it constitutes an abuse of discretion. See id. § 187, which provides:
Where discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion.
Comment (g) to Restatement § 187 explains, however, that courts will not defer to a trustee's judgment when a conflict of interest ...