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April 2010

Conkright v. Frommert - Deferential Review Provided to the Plan Administrator

A Single Honest Mistake in Plan Interpretation Will Not Prevent Deferential Review Afforded to the Plan Administrator for Subsequent Related Plan

(April 21, 2010) 559 U.S.___ (2010); No. 08-810

On April 21, 2010, in Conkright v. Frommert ___ U.S.___ (2010), No. 08-810, the United States Supreme Court held that a deferential standard of review of the Plan Administrator's interpretation of the Plan terms is still appropriate, even where the Xerox pension Plan Administrator had made a prior honest mistake in Plan interpretation.

Here, several employees of Xerox left the company in the 1980's and received a lump sum distribution of retirement benefits under Xerox's pension Plan (the "Plan").  Some of these same employees were later rehired by Xerox.  The company recalculated their retirement benefits under an ERISA Plan to account for past distributions using what is called a "phantom account" method of accounting.  The employees filed suit challenging this accounting method.

The District Court granted summary judgment for the Plan.  On appeal, the Second Circuit Court of Appeals held the Plan Administrator's interpretation of the Plan was unreasonable and the Plan participants had not received adequate notice that the "phantom" method would be used to calculate their benefits.  In remanding the case, the Second Circuit Court of Appeals created an exception to the Firestone deference rule, holding that a court need not apply a deferential standard when the plan administrator's previous construction for the same plan terms was found to violate ERISA.

On remand, the District Court declined to apply a deferential standard, and instead mistakenly adopted an approach that did not account for the time value of money.  Affirming in part, the Second Circuit held the District Court was correct not to apply a deferential standard on remand and the Districts Court's decision on the merits was not an abuse of its discretion.

The United States Supreme Court, Justice Roberts writing from the majority in a 5 to 3 opinion, with Justice Sotomayor taking no part in the decision, rejected the Second Circuit's "one-strike-and-you're-out-approach" as an exception to the Firestone deference rule and reiterated its analysis espoused in Metropolitan Life Insurance Company v. Glenn 544 U.S. ___ (2009), to wit: "there is little place in the ERISA context for these sorts of 'special procedural' rules that would create further complexity adding time and expense to a process that may already be too costly for many of those who seek redress."  The Supreme Court made clear that ad hoc exceptions to the Firestone deference rule are not permitted.  The Firestone deference rule serves to avoid exceptions and preserves the "careful balancing" of interests.  It protects ERISA's interest in efficiency, predictability, and uniformity, which do not suddenly disappear simply because of a single honest mistake.

In an apparent effort to address concerns that the Supreme Court's decision would encourage plan administrators to adopt unreasonable interpretations of plans in the belief that a second chance to interpret the plan terms would be rewarded, the Supreme Court stated that "[t]here is no reason to think that deference would be required in the extreme circumstance and that multiple erroneous interpretations may lead to a finding that the plan administrator is too incompetent to exercise his discretion fairly."  However, the Supreme Court was quick to point out that applying a deferential standard of review does not mean that the plan administrator will prevail on the merits.  Rather it means only that the plan administrator's interpretation of the plan will not be disturbed if reasonable.

Based upon the holding in this matter, it is clear that the principles set forth in Firestone, as well as the terms of the Plan, continue to guide the Supreme Court in the determination of the appropriate standard of review.

This opinion is not final.  It may be withdrawn from publication. Should this take place, this opinion would be unavailable for use as legal authority in other cases.

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