The Employee Retirement Security Act (ERISA) has long-required that employee benefit plans (e.g., pension and welfare plans) provide “a full and fair review” of any decision denying a participant’s claim for benefits. ERISA §503, 29 U.S.C. §1133. Accordingly, most employee benefit plans provide procedures for submitting a claim for benefits to the plan administrator and for requesting a review of any denial of the claim.

Often, the merits of a participant’s claim will turn on the interpretation of disputed plan language. The plan administrator may have one interpretation, while the plan participant has another. In this situation, whose interpretation controls? Where the plan language is clear and unambiguous, courts will enforce the interpretation that is consistent with that language.

But, when disputed plan language is unclear or ambiguous, the courts look to see whether the plan gives the plan administrator discretion to interpret the plan. If it does not, the courts will review the plan administrator’s adverse benefits decision “de novo.” This means the court will review the disputed plan language afresh and anew and reach its own conclusion as to the proper interpretation.

If, however, the plan gives the plan administrator discretion to interpret the plan, the courts will defer to the plan administrator’s interpretation of the ambiguous plan language so long as it is reasonable. The courts refer to this highly deferential standard of review as the “arbitrary and capricious” standard. Under that standard, courts must affirm a plan administrator’s reasonable interpretation of disputed plan language even where the plan participant’s interpretation is MORE reasonable.

Obviously, the arbitrary and capricious standard of reviewing a plan administrator’s adverse benefits decision works to the participant’s disadvantage because, under that standard, the plan administrator’s interpretation always controls unless it is downright unreasonable. This is contrary to ERISA’s stated goal of protecting participants’ interests in their employer-provided benefits. ERISA §2, 29 U.S.C. §1001. Indeed, no ERISA provision requires courts to apply an arbitrary and capricious standard of review.

So, where did courts get the idea they must apply this highly deferential standard of review whenever the plan gives the plan administrator discretion to interpret the plan? Simply put: The United States Supreme Court–in a case that is now over 30 years old. Firestone Tire & Rubber Co. V. Bruch, 489 U.S. 101 (1989). Here are the pertinent facts of that case.

In 1980, Firestone sold five of its plants to Occidental Petroleum Company. Most of the approximately 500 employees at the plants were rehired by Occidental and continued in their same positions and at the same rate of pay. Six of the rehired employees sought severance benefits under Firestone’s termination pay plan. Firestone, who was the administrator for the plan, denied their claims. So, the employees sued in federal district court. The district court ruled for Firestone, applying the arbitrary and capricious standard of review, but the Third Circuit Court of Appeals reversed, applying the de novo standard of review. The Supreme Court agreed to review the Third Circuit’s ruling in order to resolve a conflict among the Courts of Appeals as to the applicable standard of review in cases based on the terms of an ERISA plan.

As an initial matter, the Supreme Court noted that ERISA does not set out the appropriate standard of review for claims for benefits under the terms of an ERISA plan. But, the Court explained, ERISA “abounds with the language and terminology of trust law” and, under trust law, if a trustee is given the power to construe disputed or doubtful terms, the trustee’s interpretation will not be disturbed if it is reasonable. Because Firestone’s termination pay plan did not give the plan administrator (Firestone) discretion to interpret its provisions, the Court held that the de novo standard of review applied to the employees’ claims. The Court added that this trust law de novo review was consistent with the judicial interpretation of employee benefit plans before ERISA was enacted when the plan did not give the plan administrator discretion to construe uncertain terms.

Following the Supreme Court’s decision in Firestone, nearly all ERISA-governed pension and welfare plans expressly provide, or have been amended to provide, plan administrators with discretion to interpret the plan. Consequently, if there is any litigation based on the terms of the plan, the court must apply the arbitrary and capricious standard of review. This clearly puts ERISA claimants at a disadvantage in at least three ways.

First, they may have difficulty finding competent legal counsel to represent them on a contingency basis because their claim will be deemed more risky than if the de novo standard of review applied.

Second, the court will not review the claim afresh and anew as it would under the de novo standard.

Third, even if the court believes the ERISA claimant’s interpretation is MORE reasonable than the plan administrator’s reasonable interpretation, the court will affirm the plan administrator’s adverse benefits decision.

The arbitrary and capricious standard of review also invites fuzzy drafting of plan provisions. As noted, if the plan language is clear and unambiguous, the court will enforce the interpretation that is consistent with that language. However, if the plan language is a bit murky, the plan administrator may argue for a different, seemingly reasonable, interpretation knowing the arbitrary and capricious standard of review will apply in any ensuing litigation. That interpretation is likely to be unfavorable to the ERISA claimant; otherwise, there would be no need for a lawsuit.

Clearly, it is time to do-away with the arbitrary and capricious standard of review for ERISA-governed employee benefit claims. Congress could easily make that happen by adding the following language to the end of ERISA §502(a)(1)(B) [the remedial statute for claims for benefits under the terms of an ERISA plan]:

“and any administrative decision considered by the court under this subparagraph shall be reviewed de novo.”  

That’s it. Sixteen simple words added to ERISA’s remedial statute that would give ERISA claimants a fairer or more equal shot at obtaining a favorable ruling from the court on their benefits claim. No major legislation or tax dollars required!

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