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October Term, 2007 

June 19, 2008

Today the Supreme Court issued four decisions, described below, of interest to the business community. The decisions address the following subjects:

ERISA—Plan Administrators and "Structural" Conflicts of Interest: Metropolitan Life Ins. Co. v. Glenn, No. 06-923 (previously discussed in the January 21, 2008 Docket Alert).

The Supreme Court today held that (1) an insurer who both administers and funds an Employee Retirement Income Security Act (ERISA) benefits plan operates under a conflict of interest; and (2) courts should consider that conflict of interest when reviewing a conflicted insurer's denial of benefits, but should give the conflict varying weight based on the circumstances of the case. The decision preserves deferential review for denials of benefits by conflicted insurers but it gives the lower courts wide latitude in deciding how much weight to give the conflict of interest in any particular case. The decision also provides a roadmap for how plan administrators—both employers that administer their own ERISA plans and insurance companies that administer plans for employers—can preserve deferential review in the courts.

In Metropolitan Life Insurance Co. v. Glenn, the plaintiff had been denied long-term disability benefits under a plan sponsored by her employer, Sears, and administered and insured by MetLife. The district court affirmed MetLife's denial of benefits. The Sixth Circuit, however, reversed. It held that MetLife’s dual role—as administrator and funder of the plan—created an "apparent conflict of interest" that was one of several factors supporting its conclusion that the denial of benefits was unreasonable.

In an opinion by Justice Breyer, the Supreme Court affirmed. First, the Court held unanimously that an insurer who both administers and funds an ERISA benefits plan operates under an actual, and not merely potential, conflict of interest. Second, and with the support of six justices, the Court held that when a court reviews a denial of benefits by a conflicted insurer, the reviewing court should weigh the conflict "as a factor" of varying significance "depend[ing] upon the circumstances of the particular case." In lieu of giving "a detailed set of instructions" to lower courts, the Court stuck to broad themes: review of a conflicted insurer's denial of benefits should still be deferential, the presence of a conflict of interest is part of "the combination-of-factors" a court should consider, how it does so depends on the circumstances, and the significance of a conflict may be reduced "where the administrator has taken active steps to reduce potential bias and to promote accuracy."

Four justices wrote or joined opinions agreeing in part with the majority. Justice Kennedy, concurring in part and dissenting in part, agreed with both of the Court's holdings but would have remanded for consideration under the new standard. Three justices—Chief Justice Roberts, Justice Scalia, and Justice Thomas—agreed with the Court's first holding but would not have considered the conflict of interest without evidence that it actually motivated the denial of benefits. These three justices divided on what should be the disposition of the case: the Chief Justice, writing for himself, would have affirmed because the denial of benefits was unreasonable on other grounds; Justice Scalia, writing for himself and Justice Thomas, would have remanded for consideration of whether the denial of benefits was reasonable without regard to the conflict of interest.

The Court's decision today is significant for four reasons. First, it resolved a deep split among the courts of appeals about how to review decisions by an insurer who administers and funds an ERISA benefits plan and did so by encouraging courts to take into account an insurer's conflict of interest. Second, it clarified that benefit denials by conflicted decisionmakers are still entitled to deference—a partial win for employers and insurers that otherwise would have faced de novo review of most of their denials of benefits under ERISA plans. Third, in dicta the Court indicated that employers who fund and administer their own plans also operate under a conflict of interest. Fourth, and of great significance for litigation going forward, the Court offered a roadmap for how a conflicted decisionmaker could lessen the significance of its conflict of interest. The Court said that a conflict of interest "should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy." As examples, the Court mentioned "walling off claims administrators from those interested in firm finances" and "imposing management checks that penalize inaccurate decisionmaking irrespective of whom the inaccuracy benefits.”

Labor Law—Federal Preemption—Preemption of State Law Prohibiting Use of State Funds by Private Employers in Union Organizing Campaigns: Chamber of Commerce v. Brown, No. 06-939 (previously discussed in the Nov. 20, 2007 Docket Report)

The Supreme Court today held that Federal labor law preempts states from imposing restrictions on the use of state funds to effectively regulate employer speech concerning union organization. The decision affirms the right of employers, including those who receive state funds, to exercise their noncoercive speech rights on labor matters, consistent with the National Labor Relations Act.

A California statute, enacted in 2000, prohibited private employers receiving state grants (of any amount) or state program funds (in excess of $10,000 per annum) from using that money "to assist, promote, or deter union organizing." The Court, in an opinion by Justice Stevens, held that these provisions were preempted under the principles of Machinists v. Wisconsin Employment Relations Commission, 427 U.S. 132 (1976), because they restricted conduct that Congress intended to leave unregulated. The Court concluded that, with certain narrow exceptions, employers’ noncoercive speech activity on the subject of union organizing is within “a zone protected and reserved for market freedom,” finding within the text, history, and structure of the NLRA a congressional policy “favoring uninhibited, robust, and wide-open debate” on labor disputes.

The Court rejected California’s suggestion that the regulations were merely permissible restrictions on the use of state funds, concluding instead that the restrictions amounted to an impermissible attempt to indirectly regulate and curb protected conduct. In so doing, the Court reemphasized previous indications that, in the context of NLRA preemption, the appropriate consideration is the activity a state seeks to regulate, rather than the form of regulation it chooses to adopt.

Employment Law—Age Discrimination In Employment Act—Burden of Persuasion: Meacham v. Knolls Atomic Power Lab., No. 06-1505 (previously discussed in the January 21, 2008 Docket Report).

Under the Age Discrimination in Employment Act (ADEA or Act), 29 U.S.C. § 621 et seq., there is an exemption for employer actions “otherwise prohibited” by the Act that are “based on reasonable factors other than age.” 29 U.S.C. § 623(f)(1). The Supreme Court today held that an employer facing a disparate-impact claim under the ADEA bears both the burden of production and the burden of persuasion for the “reasonable factors other than age” (RFOA) defense. The decision in the case is a significant one. As the Court itself recognized, the decision “makes it harder and costlier” for employers to defend against ADEA disparate-impact claims than if they “merely bore the burden of production.” Slip op. 16.

In an effort to reduce its work force, respondent Knolls Atomic Power Laboratory (Knolls) instructed its managers to score their subordinates on “performance,” “flexibility,” and “critical skills.” On the basis of these scores, in addition to points for years of service, Knolls determined which employees to lay off. Nearly all of the employees laid off were at least 40 years old. Petitioners, who were among those laid off, brought suit asserting a disparate-impact claim under the ADEA. The jury returned a verdict in favor of petitioners, but the Second Circuit reversed, holding that they had failed to carry their burden of persuasion as to the reasonableness of the factors relied upon by Knolls.

In an opinion by Justice Souter, the Supreme Court vacated the Second Circuit’s decision. The Court reasoned that the structure of the ADEA—which includes general prohibitions on age discrimination and then sets forth exemptions to those prohibitions in a separate provision (Section 623(f))—indicates that the RFOA exemption establishes an affirmative defense. The Court found that conclusion confirmed by its prior cases holding that the exemption for bona fide occupational qualifications, which appears beside the RFOA exemption in the statute, is an affirmative defense. Traditionally, the burden of proof for affirmative defenses is on the party asserting the defense, and the Court refused to deviate from that convention absent “compelling reasons to think that Congress meant to put the burden of persuasion on the other side.” Slip op. 6. In so holding, the Court reaffirmed that the business-necessity test does not apply to ADEA disparate-impact suits.

At the conclusion of its opinion, the Court made clear that the plaintiff in an ADEA disparate-impact case is required to identify the specific employment practice that is allegedly responsible for the impermissible disparate impact. Noting that this “is not a trivial burden,” the Court sought to reassure employers that its decision would not “encourage strike suits or nudge plaintiffs with marginal cases into court.” Slip op. 16.

Justice Scalia concurred in the judgment. He would have vacated the Second Circuit’s decision on the ground that Congress placed the issues before the Court in the hands of the Equal Employment Opportunity Commission, which, in his view, resolved those issues reasonably. Justice Thomas concurred in part and dissented in part. He agreed with the Court that RFOA is an affirmative defense but would have affirmed the decision below on the ground that disparate-impact claims are not cognizable under the ADEA. Justice Breyer did not participate.

Employment Discrimination—Age Discrimination in Employment Act—Facial Discrimination and Inference of Discriminatory Intent: Kentucky Ret. Sys. v. EEOC, No. 06-103 (previously discussed in the September 25, 2007 Docket Report).

The Supreme Court today held that, when an employer adopts a pension plan that includes the employee’s age as a factor and treats employees differently based on their pension status, a plaintiff alleging disparate treatment under the Age Discrimination in Employment Act (ADEA or Act), 29 U.S.C. § 621 et seq., “must adduce sufficient evidence to show that the differential treatment was ‘actually motivated’ by age, not pension status.” Slip op. 11. This is an important decision for employers with pension plans that take age into account in determining benefits.

Under Kentucky’s pension plan (Plan), “hazardous position” workers (including policemen and firemen) receive “normal retirement” benefits after either working 20 years or working 5 years and reaching the age of 55. The Plan calculates “normal retirement” benefits on the basis of the employee’s final salary and years of service. The Plan also pays “disability retirement” benefits to workers who become seriously disabled but have not otherwise become eligible for “normal retirement.” In calculating “disability retirement” benefits, the Plan adds to an employee’s actual years of service the number of years the employee would have had to work to become eligible for “normal retirement” benefits.

Charles Lickteig, a worker covered by the Plan, became disabled at the age of 61, with 18 years of service. Because he became disabled after having already become eligible for “normal retirement” benefits, the Plan did not impute any additional years in calculating his annual pension. Had Lickteig become disabled before reaching the age of 55, additional years would have been imputed. The Equal Employment Opportunity Commission filed suit, alleging a violation of the ADEA. The district court granted summary judgment for the defendants, but the en banc Sixth Circuit reversed.

In an opinion by Justice Breyer, the Supreme Court reversed. The Court held that the Plan did not violate the ADEA because (1) under the holding of Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), age and pension status are “analytically distinct” concepts; (2) there is no evidence that the Plan used pension status as a proxy for age; (3) the Plan had a clear non-age-related rationale and age factors into the “disability retirement” calculation only because the “normal retirement” rules permissibly consider age; (4) the Plan did not uniformly disadvantage older employees; (5) the Plan did not rely on any pernicious stereotypes about older workers; and (6) finding the Plan unlawful would leave Kentucky with no clear criteria for determining how many extra years to impute for workers who become disabled at age 55 or older.

In a dissenting opinion joined by Justices Scalia, Ginsburg, and Alito, Justice Kennedy argued that, under a straightforward interpretation of the ADEA, the “use of age in a formal, facial, deliberate and explicit manner, to the detriment of older employees,” violates the Act. Slip op. 1 (dissenting opinion).


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