Court: Court of Appeals for the Ninth Circuit; May 8, 2001; Federal Appellate Court
UNUM Life Insurance Company of America appealed a judgment awarding attorneys’ fees to John Dishman, a participant in an ERISA plan who claimed long-term disability benefits. Dishman cross-appealed, arguing that his state law tort claim was incorrectly dismissed as preempted. The court affirmed in part and reversed in part.
Dishman, the Executive Director of the Adams, Duque, Hazeltine law firm, resigned in 1993 due to debilitating migraine headaches and subsequently received monthly long-term disability benefits of $11,500 from UNUM, effective November 1993. Following the approval of his claim, UNUM acquired two neurologist reports confirming the severity of his condition and a vocational expert's recommendation to settle due to the established nature of Dishman’s disability and his unsuccessful attempts to improve his work capacity.
In April 1995, UNUM moved Dishman’s claim to its Complex Claim Unit due to the significant reserve amount of $497,154. Frankie Puthoff was assigned to his claim, initiating an investigation that included hiring private investigators for a "work and sports check" and requesting two Independent Medical Evaluations (IMEs), which were never conducted. An ambiguous report suggested Dishman might be employed by Semiotix, Inc., prompting Puthoff to terminate his benefits based on this and other findings, despite Dishman's assertion that he was not employed by Semiotix.
During a July 1995 call, Puthoff informed Dishman of the benefits suspension, requiring clarification on his relationship with Semiotix and tax returns, although the AD. H. policy did not provide for benefit suspension. UNUM acted without a medical opinion indicating Dishman was no longer disabled or that his alleged activities confirmed he could perform his occupation, and it failed to verify if any payments from Semiotix necessitated a reduction in benefits.
UNUM received two investigative reports after July 18, 1995, confirming that Dishman was not an employee of Semiotix but did not restore his benefits. After hiring an attorney, Dishman engaged in correspondence with UNUM, which included several critical points: (1) Dishman's proposal for an examination by a neutral neurologist was declined by UNUM; (2) UNUM replaced its request for Dishman's tax returns with a demand for a forensic accounting firm to audit Semiotix; (3) UNUM warned that failure to cooperate with the audit would result in closing his file; (4) Despite no mental disability exclusion in Dishman's policy, UNUM required an evaluation by a forensic psychiatrist, providing conflicting justifications; (5) UNUM ignored Dishman's initial request for its claims procedure and later stated it had no claims procedure for benefit suspension or termination. Consequently, Dishman filed a lawsuit, claiming nonpayment of benefits and vicarious liability for privacy invasion by investigative firms hired by UNUM. The district court dismissed the state law claim without a hearing, likely due to ERISA preemption concerns. Dishman prevailed at a bench trial on his benefits claims, but UNUM appealed, and Dishman cross-appealed the dismissal of his privacy claim. An earlier memorandum indicated that neither order was appealable due to a provision allowing future amendments. Following Dishman's motion, the district court issued a modified judgment finalizing both orders, allowing the appeals to proceed. Dishman alleged vicarious liability against UNUM for privacy invasions involving deceptive investigative practices. UNUM did not contest the validity of the state law claim but argued it was preempted by ERISA, leading the district court to dismiss the claim. The complexities of determining ERISA preemption were highlighted, referencing prior judicial challenges in this area.
In 1997, Justice Scalia noted that the Supreme Court's fourteen ERISA preemption cases lacked clarity, a sentiment that remains true for the subsequent three cases. The core issue revolves around the interpretation of "relate to" in ERISA's preemption provision (29 U.S.C. 1144(a)), which states that ERISA supersedes any state laws related to employee benefit plans. The Supreme Court established in 1983 that a law "relates to" an employee benefit plan if it has a connection to such a plan. However, this standard proved problematic over the years. In New York Conference of Blue Cross, Blue Shield Plans v. Travelers Insurance Co., the Court highlighted that neither "infinite relations" nor "uncritical literalism" can adequately measure preemption. Instead, the Court advocates for analyzing state laws based on the objectives of ERISA to determine whether they have impermissible connections to ERISA plans.
ERISA's preemption is designed to create a uniform regulatory environment for employee benefit plans, reducing the administrative burdens of conflicting state and federal laws. The Supreme Court has consistently held that ERISA preempts state laws that dictate employee benefit structures or provide alternative enforcement mechanisms. For instance, in Shaw v. Delta Air Lines, Inc., the Court preempted New York's Human Rights Law, which required equal benefits for pregnancy-related disabilities, as it forced ERISA plan administrators to alter benefit structures based on state mandates. Additional examples include a Pennsylvania law mandating different benefit calculations and a New Jersey law preventing certain offsets in benefit calculations. Both laws were deemed problematic as they necessitated divergent administration of benefits across states. A recent case involving a Washington statute on beneficiary designation revocations similarly posed issues, as it constrained ERISA plan administrators to specific rules, conflicting with ERISA’s objectives.
Plan administrators are required to understand state statutes to determine if a named beneficiary’s status has been legally revoked, rather than simply making payments based on the beneficiary identified in plan documents. The Court ruled that Washington law, which affects benefit payments and thus interferes with uniform plan administration, is preempted by ERISA. California's common law tort remedy for invasion of privacy is not comparable to laws previously deemed violative of ERISA standards, as it does not mandate employee benefit structures or their administration. The tort remedy does not interfere with uniform plan administration to the extent of laws cited in prior cases.
State laws may also be preempted if they provide alternative enforcement mechanisms related to ERISA plans, as seen in cases like Ingersoll-Rand Co. v. McClendon. ERISA supersedes various state law causes of action, including wrongful denial of benefits claims. Claimants cannot pursue relief by recharacterizing ERISA claims as state law torts. In Bast v. Prudential Insurance Co. of America, claims related to emotional distress and breach of contract were preempted because they stemmed from the denial of benefits, demonstrating a direct connection to the ERISA claim process. The Basts' situation involved seeking an alternative enforcement mechanism through state law, while Dishman's claims do not attempt to achieve through tort what ERISA would not provide.
Damages for invasion of privacy claimed by Dishman are independent of UNUM's potential payment of his claim. Dishman’s tort claim does not fundamentally derive from his benefits claim, despite UNUM's assertion that the claim must relate to the insurance plan. UNUM argues that its investigation into Dishman’s disability claim ties the tort claim to the plan, but this perspective fails to consider that preemption under ERISA does not occur unless the state law has a substantial connection to the plan. The conduct in question, although occurring during UNUM's plan administration, is insufficient for preemption. The document illustrates that if such conduct were permitted, it could lead to tortious actions being excused under the guise of plan administration. The court reverses the district court's dismissal of the state law claim, ordering it to proceed.
Regarding the exhaustion of administrative remedies in ERISA actions, federal courts typically enforce this requirement, but exceptions exist. The district court found no abuse of discretion when it excused Dishman's failure to exhaust remedies, citing inadequate notice from UNUM about the denial of his claim and appeals process. The court supported this with evidence, including a July 18, 1995, phone call where UNUM initially denied Dishman’s claim but later stated it was merely "suspending" benefits. The lack of clarity in UNUM's communication, including ignoring Dishman’s requests for the claims procedures related to suspension, justified the district court's findings.
UNUM failed to provide Dishman or his counsel with the claims procedure, and the district court found no clear error in this finding. Consequently, the court excused Dishman’s failure to exhaust his administrative remedies, particularly since it offered UNUM thirty days to conduct an administrative process, which UNUM rejected. The court’s discretion to allow Dishman to proceed directly to litigation was not abused.
UNUM argued that the district court should have limited its de novo review of the denial of benefits to the administrative record. However, precedent allows for additional evidence outside the administrative record if circumstances warrant. Here, since there was no administrative review prior to UNUM’s decision to suspend benefits, Dishman was not at fault for failing to submit further evidence, especially given UNUM's indication that no appeals process was available.
The need for external evidence was more compelling in this case than in previous rulings, as UNUM’s own actions had effectively eliminated the possibility of an administrative record. UNUM's claims that Dishman was in the wrong were rejected by the district court, which found no clear factual errors in its conclusions. UNUM's failure to follow proper procedures precluded Dishman from presenting his case adequately prior to the termination of benefits. The district court's decision was upheld without error.
UNUM claims it had the right to suspend Dishman’s benefits due to his refusal to provide requested information, but this argument contradicts the district court's findings. The court established that Dishman's benefits were terminated before he declined to supply information, and he had been cooperative until a call on July 18, 1995, when UNUM's representative, Puthoff, canceled a scheduled independent medical exam. The district court found that UNUM's narrative of Dishman as an uncooperative claimant was inaccurate. Even if Dishman was required to provide ongoing proof of disability and income, the court determined that UNUM lacked a legitimate purpose for suspending benefits, suggesting the action aimed to pressure Dishman into settling his claim favorably for UNUM.
Regarding attorneys’ fees, UNUM contested the district court’s award on three grounds: the inclusion of a frivolous state law claim, a punitive 16% prejudgment interest rate, and compensation for pre-litigation expenses. The court found Dishman’s invasion of privacy claim to be valid, contrary to UNUM's assertion of frivolity, leading to a reversal of its dismissal. Consequently, the attorneys’ fee award must be revisited to exclude fees related to this claim. The 16% prejudgment interest awarded was deemed excessive, as the court intended it as a penalty rather than compensation, arising from UNUM's bad faith. The court indicated it would revise this interest rate based on actual returns if UNUM could prove they were below 8%. Thus, the initial 16% was ruled an abuse of discretion, as prejudgment interest should serve solely as compensation.
A defendant’s bad faith conduct may impact the decision to award prejudgment interest, but it should not dictate the interest rate applied. The case is remanded for the district court to select a prejudgment interest rate that compensates Dishman for losses due to UNUM’s nonpayment, rather than one designed to penalize UNUM. This rate may be equal to or exceed the originally assigned 16%. UNUM contends that awarding Dishman attorneys’ fees for pre-complaint work exceeds the district court's authority and violates the precedent set in Cann v. Carpenters’ Pension Trust Fund for Northern California. However, Cann does not prohibit recovery of such fees; it clarifies that ERISA does not cover attorney fees incurred during the administrative phase before filing suit. The district court correctly recognized that it did not need to segregate administrative work from litigation work since UNUM did not provide any administrative remedy. The court determined that the hours billed prior to filing included necessary work directly related to the litigation, which is permissible under Cann. Consequently, while the award of attorneys’ fees is reversed and remanded for adjustments, the court affirmed the legitimacy of the fees claimed. Regarding postjudgment interest, UNUM argues it should accrue from an earlier judgment date, while Dishman asserts it should start from a later date when a modified judgment was entered. The law lacks clear guidance on when postjudgment interest begins, with Title 28 U.S.C. 1961(a) stating it accrues from the entry of judgment but not specifying that the judgment must be final. Dishman argues that Federal Rule of Civil Procedure 54 clarifies this, but the interpretation of what constitutes a "judgment" remains ambiguous.
A judgment that includes a particular order does not preclude the inclusion of other orders. Rule 54 states that a judgment "includes any order from which an appeal lies," but it does not inherently classify non-final judgments as non-judgments. The Sixth Circuit has indicated that Rule 54 does not clarify when post-judgment interest begins to accrue for partial or non-final judgments. The search for guidance in precedent reveals limited relevant cases. The Supreme Court's ruling in Kaiser Aluminum, Chemical Corp. v. Bonjorno, while addressing postjudgment interest, is factually distinct from the current case. In Kaiser, the court ruled that postjudgment interest should accrue from the date of the second vacated judgment, emphasizing that interest compensates plaintiffs for the delay in receiving damages. The distinction between cases involving final judgments, like Tinsley v. Sea-Land, Corp., and the current case involving only one judgment is significant, as Tinsley involved two final judgments leading to a clear ascertainment of damages. The D.C. Circuit's ruling in Mergentime Corp. v. Washington Metropolitan Area Transit Authority further illustrates this point, where postjudgment interest was determined to begin from the successor judge's final judgment rather than the prior judge's partial order.
Finality principles dictate that interest should accrue from the second, final judgment, influenced by equitable considerations. The court found it unfair for WMATA to collect prejudgment interest from the first partial judgment due to its incidental nature, stemming from the district judge's terminal illness, which prompted an earlier ruling. In contrast, the April 1997 judgment was intended to signify Dishman's victory and conclude the litigation, lacking the randomness of WMATA's situation. This judgment, despite containing one improper line, was fundamentally a final, appealable order, warranting postjudgment interest from April 20, 1999. The ruling clarifies that "judgment" under 28 U.S.C. § 1961 refers to a "final, appealable order," thereby establishing a clear standard that encourages timely actions by both plaintiffs and defendants regarding the finalization of judgments. The decision was affirmed in part, reversed in part, and remanded, with costs awarded to Dishman. Additionally, there was a noted clerical error regarding the numbering of Dishman's claims, and the dismissal of UNUM's motion lacked explanation.
The term "relate to" in the context of preemption cannot be interpreted to its fullest extent, as this would effectively nullify the preemption principle. The Supreme Court's decisions, notably in *Travelers* and *Egelhoff*, emphasize a holistic approach that considers Congressional intent rather than relying on multi-factor tests, which have proven less effective in determining whether state tort law relates to ERISA plans. The excerpt notes that Congress enacted the Pregnancy Discrimination Act to clarify that pregnancy discrimination is a form of sex discrimination, and it cites various cases regarding the interpretation of privacy invasion under California law. Despite recognizing that the information sought by UNUM may have relevance to disability benefits eligibility, its actual significance remains debatable. The document also acknowledges specific judicial circumstances where a court may need to act without requiring administrative exhaustion, especially when such avenues are futile or inadequate.
Mongeluzo (46 F.3d at 944) contrasted "necessity" with scenarios where new evidence arises after a plan administrator's decision. The Kearney court (175 F.3d at 1091) similarly addressed this distinction. Defendants claim that the plaintiff's requested attorneys' fees are excessive, asserting that fees for pre-litigation work are non-recoverable under ERISA as established in Cann (989 F.2d at 315). However, fees incurred for work related to the lawsuit before its filing are admissible for recovery, as clarified in Cann (Id. at 316). The plaintiff's work occurred up to 51 days prior to filing. Webster's Third New International Dictionary defines "include" in a way that highlights its components. The excerpt references various legal precedents and notes that while the district court's prejudgment interest rate exceeded the post-judgment rate, it was Dishman—not UNUM—who sought to modify the judgment for finality and appealability. The document does not express an opinion on whether a future district court could address similar issues with a nunc pro tunc judgment but suggests that plaintiffs should receive post-judgment interest from the date of the initial judgment, even if that judgment was initially non-appealable.
