VOL. 24, NO. 3
AUTUMN 2011
BENEFITS LAW
JOURNAL
From the Editor
Imagine a World of Perfect Disclosure
Supreme Court Unsuccessfully Searches
for a Remedy in Amara v. CIGNA
F
rom the beginning of ERISA, the courts have struggled to supply
a suitable remedy for a disclosure violation. The law requires
employers to give participants a simple, understandable description
of their plan benefits and to notify them of any changes in those
benefits. However, ERISA is silent as to what should be done when,
inevitably, disclosure mistakes are made. Amara v. CIGNA (No. 09804, 5/16/11; 563 U.S. ___ (2011)) highlights the difficulty of balancing the two competing interests in such situations. On one side are
the plan participants, who may have been harmed by misleading,
incomplete, or incorrect information provided by the company. At
the same time, an overly protective judicial approach actually can
harm participants by discouraging litigation-weary employers from
trying to distill ERISA plan complexities into reasonably plain English
or, far worse, from even offering meaningful benefit programs.
In CIGNA, the District Court clearly understood what is at stake.
However, it came up with a faulty solution, holding that CIGNA’s
“misleading” communications caused participants “likely harm” that
should be remedied by the Court amending the plan document to
award the benefits CIGNA purportedly promised to give its employees. The Supreme Court correctly remanded the lower Court’s decision, holding that plan summaries and the like do not trump the
actual plan documents. But in his majority opinion, Justice Breyer
added an unhelpful and misguided stream-of-conscience discussion
of equitable remedies that the lower court could consider on remand.
Forgoing a chance to add clarity and balance for courts searching for
From the Editor
a reasonable approach to disclosure errors, CIGNA instead adds some
quotable dicta that may help some actual and would-be victims of
bad disclosure, but it also is likely to harm many more workers by
making it more expensive and difficult for employers to offer topshelf benefit programs.
WHAT HAPPENED
CIGNA had a traditional defined benefit pension plan with a generous formula, including subsidized early retirement benefits, that
favored long-service and older employees. When CIGNA decided to
join the ranks of employers struggling to maintain their defined benefit
plans, it could have frozen or terminated the plan; instead, however,
it switched to a cash balance formula. Under the new plan structure,
each participant’s annual pension was frozen and then reconfigured as
a starting account balance that would grow with annual interest credits
and additional amounts contributed by CIGNA for each year of future
employment. CIGNA’s cash balance conversion used the “wear-away”
approach, meaning that if the participant’s frozen traditional pension
benefit was more valuable than his or her cash balance benefit, he
or she would be paid the traditional benefit and get nothing from the
cash balance account. Depending on the participant’s age, years of
service and salary, and the plan’s particulars, the frozen benefit might
end up more valuable than the cash balance benefit even after several
years of additional participation; in other words, participants initially
might not earn any additional benefits under the new program.
Some CIGNA pension plan participants were adversely affected by
this wear-away approach because first, the traditional pension included
subsidized early retirement benefits that were excluded in figuring the
starting cash balance and, second, because the cash balance program
(but not the traditional plan) paid full benefits if a participant died
before retirement and thus imposed a preretirement mortality charge.
Regardless of whether the wear-away approach is the best way to
design a plan conversion, the CIGNA plan was fully compliant.
Before the cash balance redesign was even completed, CIGNA
informed employees of the changes. Beginning with a polished consultant-crafted announcement, participants received a series of letters, kits, summary of material modifications (SMMs), summary plan
descriptions (SPDs), and ERISA Section 204(h) notices of the change
in formulas. Some participants cried foul and eventually began a class
action attempting to restore the old formula.
THE DISTRICT COURT HAS ITS SAY
In what is now well-settled law, the Connecticut District Court
ruled in February 2008 that CIGNA’s actions in switching to a cash
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From the Editor
balance approach were perfectly legal under ERISA, the Internal
Revenue Code, and age discrimination rules. [599 F. Supp. 2d 192
(Conn. 2008)] However, the Court found that CIGNA’s employee
notices “failed to properly explain the wear-away” and deliberately “misled” participants to avoid an “employee backlash likely
to result from a thorough discussion” of the changes. In a second
opinion in June 2008, the District Court found that participants had
been “likely harmed” by CIGNA’s faulty and misleading disclosures.
It ruled the appropriate remedy was for the Court to modify the
plan’s terms to eliminate the wear-away that CIGNA failed to properly disclose. [534 F. Supp. 2d 288 (Conn. 2008)] In other words,
the lower court ruled that employees were entitled to their frozen
pension plus the new cash balance benefits, instead of the better
of the two benefits.
Interestingly, the District Court believed that the only available
remedy in this case was to rewrite the plan document and allow
participants to sue under ERISA Section 502(a)(1) to recover their
benefits, per the plan terms as amended by the Court. The District
Court read the Supreme Court’s opinions (Variety v. Howe; Sereboff
v. Mid Atlantic; Great-West v. Knudson; and Mertins v. Hewitt)
interpreting the limits of “appropriate equitable relief” under ERISA
Section 502(3) as preventing an award of additional benefits beyond
what the plan calls for as improper monetary relief. The District
Court’s two opinions were rubber-stamped by the Second Circuit
per curium, which surprisingly didn’t choose to weigh-in on this
important issue.
The District Court’s decisions were disturbing for two reasons. First,
it held that mistaken plan summaries can, in effect, have the consequence of rewriting the plan document if the summary gives participants a better deal than the actual plan. Second, the District Court
determined that it could rewrite the plan document if it appeared that
participants were likely harmed by the misleading disclosure, without
any proof of actual harm.
THE SUPREME COURT COUNTERS
Justice Breyer’s opinion made quick work of the District Court’s
view that the likely harm caused by CIGNA’s disclosure violations
gave the Court license to rewrite the terms of the plan. The eight
Justices (Justice Sotomayor did not participate) unanimously agreed
that ERISA Section 502(a)(1)(B) allows participants to sue to enforce
the terms of a plan, but that ERISA does not authorize a court to
change the terms of a plan document. Thus, a participant cannot sue
to enforce the terms of a plan summary. The Supreme Court correctly
recognized that if summaries could be enforced as plan documents,
the summaries would be written in complete legalese, as if they were
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From the Editor
plan documents, and would thus be completely unintelligible to participants.
DANCE OF DICTA
Then, in what Justice Scalia wrote in his concurrence (joined by
Justice Thomas) was “purely dicta,” Justice Breyer embarked on a
lengthy discourse as to what other relief the District Court might
wish to consider on remand. Justice Breyer focused his attention on
ERISA Section 502(a)(3), which allows participants to sue for “other
appropriate equitable relief.” Once again when dealing with this
section, the Court journeyed through the dusty and arcane common
law distinction between courts of law and equity, citing centuriesold precedents. Justice Breyer said he feared the District Court might
have misread the several Supreme Court decisions on the scope of
appropriate equitable relief. Of course, like the District Court, many
ERISA lawyers also read the Supreme Court’s rulings the same way:
that unless a participant could prove he or she detrimentally relied on
a bad disclosure, awarding extra benefits is not permitted as appropriate equitable relief under ERISA.
Justice Breyer then suggested two possible ERISA equitable remedies for misleading disclosure. The first was the well-established
doctrine of detrimental reliance: if a participant relied on the bad
disclosure, the employer must make good his or her loss. Participants
have generally found it difficult to win on detrimental reliance, often
because while they may have been disappointed that their benefits
weren’t as generous as expected, they weren’t injured. CIGNA is a
perfect illustration. Most participants would have ended up in the
same position whether the disclosure was precise or misleading:
working for CIGNA and earning whatever benefits they were entitled to under the new plan. It is improbable that more than a handful would have changed jobs, demanded and received a larger raise,
or taken other action had they known about the wear-away. More
to the point, it is rather difficult to bring a class action suit for damages from relying on poor disclosure. The proof of reliance and the
resulting damages are specific to each participant and, as in CIGNA’s
case, probably nonexistent for many members of the “class.”
This prompted Justice Breyer to ponder whether the participants
might be entitled to a surcharge—an equitable remedy where participants are “made whole following a breach ....” According to his thinking, surcharge is a flexible remedy where the participants would have
to show “actual harm” by a preponderance of evidence to collect.
What type of harm? The opinion observed that it “was not difficult to
imagine how the [ERISA disclosure violations] injured employees even
if they did not act in reliance on the summary documents—which
they might not have even seen” [emphasis added]. The opinion further
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From the Editor
imagined water cooler conversations in which the otherwise uninformed and oblivious would have heard and then been somehow
injured by the misleading description of the new wear-away formula.
(As an aside, keep in mind that CIGNA was then a leading player in
the pension, 401(k), and retirement business. Presumably, at least
some of its army of in-house actuaries, lawyers, and consultants
would have quickly seen through the bad disclosure and would have
known from the start what the deal was.) Still, the Court was clear
that merely the judicially assumed “likely harm” was not sufficient; the
plaintiffs must prove actual harm.
Finally, Justice Breyer expounded that the participants may have
been damaged by the violation of their ERISA right to accurate disclosure, which he implied might be remedied by—wait for it—just
as the District Court ruled, giving participants both the frozen traditional and the cash balance benefits. The case was then punted back
to the District Court to consider what equitable remedies would be
appropriate given the “general principles” discussed in the majority
opinion. I haven’t read any eighteenth century law treatises lately, but
the surcharge remedy described by the majority, in what Justice Scalia
correctly called dicta, sounds awfully similar to the money damages
that the Supreme Court has consistently held are not available under
ERISA.
SUR-CHARGE!
CIGNA offers something for everyone. For defendants, the Supreme
Court discarded the notion that faulty or misleading SPDs and other
ERISA-required disclosure can be transformed into binding plan
amendments. Further, the remedy of unjust reliance/equitable estoppel remains an available remedy for participants who can show actual
harm (not just disappointment) for bad disclosure. For plaintiffs,
there are some well-turned phrases on surcharge as the new ERISA
appropriate equitable relief, which they will vigorously argue was
not dicta. Interestingly, the Fourth Circuit ruled, on the same day the
Supreme Court’s CIGNA decision was issued, that surcharge was not
an available remedy to a beneficiary of an ineligible death benefit
plan participant for the fiduciary breach of incorrectly enrolling the
would-be participant (McCravy v. Metropolitan Life Insurance Co.,
No.-1074, 5/16/11).
The upshot is that rather than a fair and reasonable solution for
fixing bad disclosure, we’re left with an all-or-nothing approach
in which participants receive either the incorrectly described more
generous benefits, or get nothing because they were disappointed
but not harmed—with the result depending on the particular judge
the parties draw. We still don’t have a middle-ground remedy that
would require employers to pay or do something to correct their
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From the Editor
bad disclosure without providing huge windfalls of unintended
benefits.
At the end of the day, some portion of the 25,000 CIGNA participants affected by the wear-away may see a bump-up in their pension
benefits. CIGNA will also make it easier for some plaintiffs to win or
favorably settle class actions for bad disclosure. Looking at the larger
picture, we’ll see SPDs, SMMs, and other documents becoming so
dense they essentially are not disclosures at all but merely materials
written by one set of lawyers and read by other lawyers searching for
something to sue over. More important, CIGNA creates another reason
why employers may decide it’s just not worth the bother and expense
to offer ERISA-regulated benefits. It’s safer and simpler to stick to the
bare minimum (or nothing)—maybe boost pay a bit—and let employees fend for themselves in preparing for retirement.
David E. Morse
Editor-in-Chief
K & L Gates LLP
New York, NY
Reprinted from Benefits Law Journal Autumn 2011, Volume 24,
Number 3, pages 1-6, with permission from Aspen Publishers, Inc.,
Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437,
www.aspenpublishers.com
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