Sally J. Burke v. Kodak Retirement Income Plan and Kodak Retirement Income Plan Committee

Citations: 336 F.3d 103; 30 Employee Benefits Cas. (BNA) 2345; 2003 U.S. App. LEXIS 14523; 2003 WL 21666136Docket: 02-9051

Court: Court of Appeals for the Second Circuit; July 17, 2003; Federal Appellate Court

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Sally J. Burke filed a lawsuit against the Kodak Retirement Income Plan and the Kodak Retirement Income Plan Committee for denying her survivor income benefits following the death of her husband, a Kodak employee. Burke argued that the denial was based on a flawed Summary Plan Description (SPD) that violated the Employee Retirement Income Security Act (ERISA). The District Court granted summary judgment to the defendants, asserting that the SPD met ERISA’s disclosure requirements and that Burke could not demonstrate detrimental reliance on the SPD.

The Circuit Court disagreed, finding that the SPD was indeed deficient as it failed to mention a crucial requirement for domestic partners—submitting a joint affidavit to qualify for benefits. The court rejected the notion that claimants must prove detrimental reliance to recover damages from a deficient SPD, stating it undermines ERISA's goal of ensuring accurate information distribution. Instead, the court adopted a prejudice standard and determined that Burke was prejudiced by the SPD's omissions.

Kenneth Burke, Sally's husband, had been a Kodak employee for 27 years, and they were domestic partners for eight years prior to their marriage in 1999. Kenneth passed away less than six months after their marriage, during which time he was enrolled in Kodak's Survivor Income Benefits (SIB) plan. Although Kodak had previously communicated the affidavit requirement through newsletters, this requirement was omitted from the revised SPD. After Kenneth's death, Kodak incorrectly informed Sally that she was ineligible for benefits due to their short marriage, leading her to appeal the decision nearly five months later, past the recommended 90-day window.

Mrs. Burke, in her appeal, provided an affidavit regarding her domestic partnership status and explained her emotional distress due to her husband's death as the reason for not appealing within the ninety-day limitations period. The Plan Administrators rejected her appeal as untimely and noted that she was ineligible for Survivor Income Benefits (SIB) because she and her husband did not submit the required joint affidavit. Following this, Mrs. Burke initiated an ERISA action, arguing that the Summary Plan Description (SPD) was deficient as it did not mention the affidavit requirement. Kodak subsequently sought summary judgment.

The district court ruled against the Plan Administrators' invocation of the ninety-day limitation, finding Kodak's notification inadequate. The court determined that Mrs. Burke could qualify for benefits as both a surviving spouse and a domestic partner, but ultimately upheld the denial of SIB due to the lack of compliance with the affidavit requirement. The court also noted that even if the SPD was deficient, Mrs. Burke failed to prove detrimental reliance on it. 

Mrs. Burke appealed, with the Plan Administrators contending that her claims were barred by her failure to exhaust administrative remedies and that her application for benefits was moot. The court found these arguments unpersuasive. It established that exhaustion of administrative remedies is a legal prerequisite under ERISA, and while Mrs. Burke acknowledged her appeal was late, the district court's refusal to enforce the limitation was upheld. The court confirmed that compliant notification of appeal procedures is essential, and Kodak's notice was deemed inadequate for failing to meet the regulatory requirements.

Kodak's denial letter to Mrs. Burke did not explicitly inform her of the ninety-day appeal period. Instead, it referred to spousal eligibility on page 98 of the handbook, while the appeals section, located on page 140, vaguely stated that an aggrieved beneficiary "should" appeal within ninety days. This ambiguity did not assist Kodak, as Mrs. Burke would likely have focused on her eligibility rather than appeal timelines. The Plan Administrators' argument that appeal rights need not be mentioned in the denial letter is misleading; relevant case law supports that denial letters must inform claimants of their appeal rights. Even if the denial letter had referenced the appeal provision, the use of "should" created confusion about the mandatory nature of the timeline for appeals. The handbook failed to convey the significance of adhering to the ninety-day limit, and Kodak had multiple opportunities to use clearer, mandatory language regarding appeals elsewhere in their documentation. Consequently, it was determined that Mrs. Burke was not afforded the full and fair review mandated by 29 U.S.C. § 1133 and Department of Labor regulations.

Mrs. Burke's marriage was argued by the Plan Administrators to "moot" her eligibility for domestic partner benefits, claiming that the district court erred in adjudicating her claim. The district court presumed she could seek benefits as either a spouse or domestic partner. The Plan Administrators have discretionary power to interpret the plan, and their decision regarding Mrs. Burke's eligibility is subject to an arbitrary and capricious standard of review. Their assertion that marriage precludes domestic partnership benefits is criticized as arbitrary and capricious since it was not included in their denial letter but raised later in litigation. The court found that the plan documents do not support the notion that marrying forfeits domestic partner benefits, and such a conclusion is unreasonable and potentially discriminatory, particularly if it results in a year of non-coverage for domestic partners who marry.

The district court's decision to evaluate Mrs. Burke's eligibility for benefits as both a spouse and domestic partner was validated. Regarding Mrs. Burke's ERISA claims, the review of a summary judgment is performed de novo, favoring the non-movant, and is appropriate only if no material facts are in dispute. Both parties agreed that the arbitrary and capricious standard applies to the denial of benefits for non-compliance with the domestic partnership affidavit requirement. However, the appropriate standard of review for whether the Summary Plan Description (SPD) adheres to ERISA disclosure requirements is unclear, with some courts applying a de novo standard. The court concluded Xerox's SPD failed to meet disclosure standards under either review method, and therefore did not need to determine the applicable standard, as Mrs. Burke would succeed under both.

ERISA mandates that employers provide Summary Plan Descriptions (SPDs) to employees, outlining benefits in an accessible manner that informs participants of their rights and obligations (29 U.S.C. 1022(a), 1024(b)). SPDs must include eligibility criteria for benefits and circumstances leading to disqualification or loss of benefits (29 U.S.C. 1022(b)). They must avoid misleading formats, ensuring that restrictions on benefits are clear and not minimized (29 C.F.R. 2520.102-2(b)). While restrictions do not need to be disclosed alongside benefit summaries, clear cross-references are typically required (29 C.F.R. 2520.102-2(a)).

In conflicts between a plan and its SPD, the SPD prevails, as it represents the primary source of information for employees regarding benefits (Heidgerd v. Olin Corp., 906 F.2d 903, 907-08). In the case of Kodak, the court found that the SPD clearly outlined the requirement for a domestic partnership affidavit in multiple sections, but this requirement was absent from the Self-Insured Benefits (SIB) section, leading to a conflict. The court emphasized that the absence of a cross-reference in the SIB section was significant, as plan participants should not be expected to infer eligibility requirements from other sections. Additionally, the SIB section lacked a definition of "domestic partners," despite providing definitions for other beneficiaries, which could lead participants to believe no detailed requirements existed for domestic partners.

The Court addresses the compliance of Kodak's Summary Plan Description (SPD) with ERISA requirements, rejecting Kodak's argument that deficiencies were rectified by subsequent communications, namely a 1996 Newsletter and a 1997 Benefits Update. The Court emphasizes that these documents were superseded by a formal SPD amendment that did not incorporate the domestic partnership affidavit requirement. It finds Kodak's SPD non-compliant with ERISA.

On the issue of whether a beneficiary must demonstrate reliance on a deficient SPD, the Court reviews the law de novo and notes a division among circuits regarding the requirement of detrimental reliance versus prejudice. While some circuits necessitate proof of detrimental reliance, others allow recovery based on either reliance or prejudice. The Second Circuit has not definitively established a standard, leading to inconsistencies in district court rulings. To ensure consistency, the Court decides to adopt a prejudice standard, concluding that the Burkes experienced legal prejudice due to the SPD's deficiencies, although it disagrees with the district court's findings regarding reliance.

A prejudice standard aligns with ERISA's goal of protecting employees from inadequate Summary Plan Descriptions (SPDs) and is preferred over a detrimental reliance rule, which can impose undue hardships on plaintiffs, particularly the estates of deceased participants. Such a reliance requirement does not further the legislative intent to ensure beneficiaries are well-informed of their rights. Courts vary in their application of the prejudice standard, with some equating reliance and prejudice while others treat them as distinct concepts. ERISA and Department of Labor regulations impose the responsibility on employers to create accurate and clear SPDs. Consequently, inaccuracies in SPDs can lead to consequences for employers, who benefit from ERISA's preemption of state law claims. For a participant to demonstrate prejudice, they must show likely harm from a deficient SPD, although employers can counter this with evidence of harmless errors.

The case of Manginaro v. Welfare Fund illustrates this principle. The SPD failed to mention a two-year statute of limitations imposed by the plan, which conflicted with New York's six-year statute. The court determined that the SPD controlled due to this conflict and adopted a "possible prejudice" standard, concluding that the plaintiffs were likely prejudiced by the omission. Had the SPD adequately disclosed the limitation, it was probable that the plaintiff would have learned about it through other channels.

The "likely prejudice" standard is utilized to protect employees' claims under federal law, creating a presumption of prejudice for plan participants after a showing of potential harm. In the case discussed, Kodak's Summary Plan Description (SPD) failed to include the requirement for a domestic partnership affidavit, leading to the conclusion that the Burkes, who relied on the SPD, were likely prejudiced. The court found that the Burkes likely believed the affidavit was unnecessary for Supplemental Income Benefits (SIB) due to this omission. 

The Plan Administrators attempted to rebut this presumption by arguing that the Burkes consciously chose not to apply for domestic partnership status due to concerns over coverage for a pre-existing condition. However, the evidence did not sufficiently counter the presumption of prejudice, as Kodak's omission likely misled the Burkes regarding the affidavit requirement. Additionally, the Plan Administrators claimed that information in Kodak's Newsletter and Benefits Update should have notified the Burkes of the requirement. Yet the record does not confirm that the Burkes viewed these documents, and they were entitled to rely on the SPD, which did not mention the requirement.

Evidence indicated that Mr. Burke had prudently designated Mrs. Burke as a beneficiary for various Kodak benefits, contradicting the idea that he would forfeit significant benefits due to negligence. Ultimately, the court applied the likely prejudice standard, concluding that the Burkes experienced prejudice from Kodak's deficient SPD. The court affirmed some findings while reversing and remanding others, instructing the district court to enter judgment for Mrs. Burke.