Tenth Circuit Revives Potential Surcharge Remedy for Fiduciary Breach Claims Brought under ERISA's "Catchall" Provision

On February 9, 2024, the Tenth Circuit issued its decision in Watson v. EMC Corporation, No. 22-1356 (Feb. 9, 2024), holding that the district court should not have dismissed the plaintiff's claim for breach of fiduciary duty and her request for surcharge as an equitable remedy. The plaintiff's husband, Thayne Watson, had worked for EMC Corporation (EMC) and participated in the company's group life insurance policy. When Mr. Watson's employment with EMC ended, he was eligible to convert his group life insurance coverage to an individual policy. An EMC benefits representative told him that he would receive a bill to continue paying for his coverage, and although he paid each seemingly relevant bill received, his life insurance coverage was never converted to an individual policy.

After Mr. Watson died on September 18, 2017, his wife filed a benefits claim, which Metropolitan Life Insurance Company (MetLife) denied. Ms. Watson then sued EMC under ERISA § 502(a)(3)(B) for breach of fiduciary duty. She sought surcharge – which courts of equity historically awarded for a loss resulting from a trustee's breach of duty or to prevent the trustee's unjust enrichment – as an equitable remedy.

The parties asked the district court to enter judgment without an evidentiary hearing. The court assumed without deciding that EMC had breached its fiduciary duty and it held that, as a matter of law, Ms. Watson could seek surcharge as an equitable remedy under § 502(a)(3). It concluded, however, that surcharge would not be "appropriate equitable relief" because Mr. Watson had not paid any premiums toward an individual policy. 

The Tenth Circuit reversed, holding that the district court committed a legal error. The three-judge panel explained that "ERISA imposes fiduciary duties on plan providers" under § 404, and that "[p]lan beneficiaries may enforce their rights through civil actions" under § 502. Although § 502(a)(1) "permits a beneficiary to bring an action 'to recover benefits due to him under the terms of his plan' or 'to enforce his rights under the terms of the plan,'" by contrast, § 502(a)(3) "does not limit a beneficiary to the terms of the plan." Instead, "it permits a beneficiary to bring an action 'to obtain other appropriate equitable relief.'" Quoting the Supreme Court's decision in Varity Corp. v. Howe, 516 U.S. 489 (1996), the Tenth Circuit described § 502(a)(3) as "a 'catchall provision[]' that 'act[s] as a safety net, offering appropriate equitable relief for injuries caused by violations that [ERISA] does not elsewhere adequately remedy,' including relief for beneficiaries harmed by breach of fiduciary duty."  

According to the panel, the district court abused its discretion because it treated Ms. Watson's § 502(a)(3) claim for fiduciary breach as a § 502(a)(1) claim to recover under the plan, when, in fact, "[t]hese provisions provide for distinct claims":  

Because Mr. Watson failed to convert his insurance from a group to an individual policy and pay premiums, Ms. Watson was not entitled to benefits "under the terms of his plan." [§ 502(a)(1)(B)]. So she sued instead for breach of fiduciary duty under § [502](a)(3)(B), seeking equitable relief "for injuries caused by violations that [ERISA] does not elsewhere adequately remedy." Varity Corp., 516 U.S. at 512. . . . By examining only whether Ms. Watson could recover under the terms of the plan, the court legally erred in treating her § [502](a)(3)(B) claim for fiduciary breach as a § [502](a)(1)(B) claim to recover under the plan.

In a footnote, the Tenth Circuit panel addressed EMC's argument that a surcharge award would, in essence, constitute "compensatory damages" that are not recoverable under § 502(a)(3)(B)'s catchall provision. EMC pointed out that in Rose v. PSA Airlines, Inc., 80 F.4th 488 (4th Cir. 2023), petition for cert. filed (U.S. Jan. 8, 2024) (No. 23-734), the Fourth Circuit recently declined to follow CIGNA Corp. v. Amara, 563 U.S. 421 (2011), in which the Supreme Court indicated that it was possible "to obtain relief by surcharge" for ERISA disclosure violations. EMC suggested that the Tenth Circuit likewise decline to follow Amara. "But without the benefit of full briefing (here or in district court) and district court analysis on whether Rose, a non-binding out-of-circuit case, should affect the surcharge issue here," the panel did not consider the question.

The Tenth Circuit was smart to have avoided wading into the issue. In Rose, decided late last year, a divided panel of the Fourth Circuit declined to follow Amara's "suggest[ion]" that certain plaintiffs might be permitted to pursue "make-whole," loss-based, monetary relief under § 502(a)(3) because such relief was analogous to surcharge. After tracing the Supreme Court's relevant jurisprudence, the Fourth Circuit rejected this part of Amara as dicta, abandoned its own precedent that had relied on Amara, and held that compensatory, make-whole monetary relief is not available under § 502(a)(3). In doing so, it pointed to the traditional view that "a plaintiff alleging unjust enrichment can get a monetary remedy under ERISA only if she seeks specific funds that are wrongfully in the defendant's possession and rightfully belong to her." In other words, "[c]ourts cannot award her relief that amounts to personal liability paid from the defendant's general assets to make the plaintiff whole."  

In Rose, which involved a mother's suit on behalf of her son's estate, the district court did not consider whether the mother had plausibly alleged "(1) that a defendant was unjustly enriched by interfering with [the son's] rights and (2) that the fruits of that unjust enrichment remain in the defendant's possession or can be traced to other assets." Rather than answer those questions itself, the Fourth Circuit remanded to the district court. But before the district court had an opportunity to reengage, the mother filed a petition for a writ of certiorari with the Supreme Court. She argues that Amara's discussion of surcharge is not dicta and that Rose was wrongly decided and diverges from decisions issued by seven other circuits, all of which have concluded in published decisions that surcharge is an equitable remedy available under § 502(a)(3) for fiduciary breach. The response to the cert petition is due March 8, 2024.

Plan Participants File Antitrust Class Action Against Hospital System Alleging Financial Harm from Rising Health Plan Costs

On February 5, 2024, a health plan participant and his family members filed a putative class-action complaint against Advocate Aurora Health, Inc. (AAH) in the U.S. District Court for the Eastern District of Wisconsin, alleging that the hospital system has engaged in various forms of anti-competitive behavior in violation of federal and state antitrust laws. Shaw v. Advocate Aurora Health Inc., No. 2:24-cv-00157 (E.D. Wis. Feb. 5, 2024). According to the complaint, "[t]he supracompetitive prices AAH extracts from Wisconsin commercial health plans are in turn passed on to their members in the forms of higher premium payments, and members directly pay AAH higher deductible, co-pay, and co-insurance payments, resulting in rising healthcare costs in Wisconsin." The putative class includes participants in both self-funded and fully insured plans, including ERISA plans, although the complaint does not allege any ERISA violations. This lawsuit is the second class action brought against AAH in the Eastern District of Wisconsin, following Uriel Pharmacy Health and Welfare Plan v. Advocate Aurora Health, Inc., No. 22-CV-00610 (E.D. Wis. May 24, 2022). The plaintiffs in Uriel seek to represent a class of self-funded employee health plans and allege substantively similar claims against AAH as the plaintiffs in Shaw. 

AAH is one of the largest hospital systems in the Midwest. According to the Shaw lawsuit, AAH has for years engaged in anti-competitive conduct amounting to unlawful restraints of trade and monopolization. The plaintiffs claim AAH has abused its significant market power in Wisconsin, Michigan, and Illinois by forcing "commercial health plans" – employee benefits plans of various types – to accept unfavorable contract terms that the plans would otherwise not accept, and which significantly raise the price of healthcare for plan members. The complaint alleges six main anti-competitive tactics:

1. Imposing "all or nothing" terms in its contracts with insurance companies, such that all AAH facilities must be included in health plan networks despite many facilities' non-competitive offerings
2. "Punishing" innovative, cost-saving insurance products, like reference-based pricing, by refusing to accept payment from plans that use such products
3. Adding "anti-steering" and "anti-tiering" clauses to its contracts with insurance companies to prevent them from encouraging plan members from seeking out other "low cost, high quality" care options
4. Forcing physicians to accept non-compete agreements that lower competition from independent providers
5. Insisting on gag clauses in contracts with insurance companies, which obscure contract terms and prices for services before the provision of care
6. Embarking on an aggressive acquisition strategy that has allowed AAH to maintain higher-than-average prices and impose these anti-competitive contract terms

According to the complaint, AAH's market share in the region forms the foundation of the lawsuit — AAH hospitals are "must have" facilities in many areas of Wisconsin, meaning that they must be included in a health plan for such plan to be viable for members in the geographic area. The complaint states that the entity AAH was formed in a 2018 merger of two area hospital systems, Aurora Health Care and Advocate Health Care, and that AAH's acquisition strategy also led to the consolidation of non-hospital specialty services under the AAH umbrella. The complaint spends significant space outlining AAH's market power, its alleged harmful consequences, and its impact on plans.

The plaintiffs in Shaw seek both monetary relief on behalf of the class and injunctive relief forcing AAH to cease its anti-competitive practices. AAH is expected to file a motion to dismiss in the case. Uriel is currently in discovery, having survived a motion to dismiss.

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