ERISA – 6th Circuit: Reversing Decades of Precedent — Court Orders Disgorgement of Profits in Long Term Disability Case

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Wow—You need to know what happened last week in the Sixth Circuit:

Disgorgement of profits as a remedy in an ERISA long term disability case?

Rochow v. LINA, __ F.3d __, 2013 WL 6333440 (6th Cir. December 6, 2013)(In a 2-1 decision, Court concludes disgorgement of unjust enrichment ($3.8m) is an appropriate equitable remedy under ERISA in a long term disability case).

It’s not over, however.  As an outsider looking in, one can expect that petitions for en banc review likely will follow.

FACTS:  Rochow filed a long term disability claim. He appealed the denial three times. Rochow then filed suit  and the District Court concluded LINA abused its discretion when it denied benefits. LINA appealed, and the Sixth Circuit affirmed and remanded.

Then, Plaintiff filed a “motion seeking an equitable accounting and a request for disgorgement.” Plaintiff claimed disgorgement of profits was appropriate because LINA breached fiduciary duties and that disgorgement was necessary to prevent LINA’s unjust enrichment resulting from profits it earned on wrongfully retained benefits. Plaintiff presented an “expert” who opined on a calculation of unjust enrichment damages.

LINA argued, among other things, that disgorgement is inappropriate because equitable relief under Section 502(a)(3) is available only when Section 502(a) fails to provide an adequate remedy.

The District Court ordered disgorgement of $3.8 million.

ISSUE: Is disgorgement an appropriate equitable relief in a long term disability claim?  YES

6th Circuit Rationale (with Dissent):

  1. “Nothing in ERISA itself or Varity [Corporation v. Howe, 516 U.S. 489 (1996)] limits this Court to allowing remedies under Section 503(a)(3) that focus on plaintiff’s injuries.” Op. at 15.
  2. “[T]he remedy of disgorgement of profits under Section 502(a)(3) was recognized by the Eighth Circuit….  Accordingly, we hold that disgorgement is an appropriate remedy under Section 502(a)(3) and can provide a separate remedy on top of a benefit recovery.”  Op. at 16.
  3. “Disgorgement does not result in double compensation….”  Op. at 15.
  4. There is a long discussion on how an expert calculates “unjust enrichment” for purposes of disgorgement of profits.  Op. at 18-23.
  5. DISSENT:
  • The decision “undermines ERISA’s remedial scheme and grants an astonishing $3,797,867.92 windfall under the catchall provision in Section 502(a)(3).”  Op. at 25.
  • “Both the Supreme Court and this Circuit have interpreted ERISA to prevent such double recoveries.”  Op. at 26.
  • “The majority’s ruling works a fundamental change in the interplay between Section 502(a)(1)(B) and Section 502(a)(3).  This is not authorized by Supreme Court precedent.”  Op. at 26.
  • “Plaintiff was made whole when he was paid his disability benefits and attorney’s fees.” Op. at 25.

Key Take Aways:

  1. There are lots of problems with this split decision.  The decision makes no sense when viewing the historical precedent on availability of equitable relief under ERISA. Besides that, denying a benefit should not be viewed, on its own, as a breach of fiduciary duty.  But that is what this majority seems to allow.
  2. Look for the Plaintiff’s bar to grab this case and add another cause of action for disgorgement.