By: Ed Cerasia and Sam Schwartz-Fenwick

On November 17, 2011, the U.S. District Court of the Western District of New York affirmed the reasonableness of a fiduciary decision in Conkright v. Frommert, 00-cv-6311L.  This ruling followed the remand of this matter from the Supreme Court.

The case involved claims by several employees who had left Xerox in the 1980’s, received lump-sum distributions of retirement benefits earned up to that point, and were later rehired and earned additional benefits under the Plan.  The Plan provided for an offset of the prior accrued benefit, and the Plan Administrator initially interpreted the Plan to call for an approach known as the “phantom account” method.  This method reduced the employee’s present benefits by the hypothetical growth that his past distributions would have experienced if the money had remained in Xerox’s investment funds.  The employees challenged this method as violating ERISA.

When the district court initially heard this matter, it granted summary judgment for the Plan, applying a deferential standard of review to the Plan Administrator’s interpretation as required by the Plan language and controlling law.  The Second Circuit vacated and remanded the district court judgment, holding that the Plan Administrator’s interpretation was unreasonable.  On remand, the district court did not apply a deferential standard of review, nor did it accept the Plan Administrator’s new approach to calculating the offset.  Rather, it adopted the employees’ approach.  The Second Circuit then affirmed that ruling, holding, in relevant part, that the district court correctly refused to apply a deferential standard on remand where the Administrator had previously been found to have abused its discretion in applying the same Plan terms.

The Supreme Court, however, rejected the Second Circuit’s decision.  Conkright v. Frommert, 130 S. Ct. 1640 (2010).  The Court looked to its precedent in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), and Metropolitan Life Ins. Co. v. Glenn, 128 S.Ct. 2343 (2008), and concluded that the Second Circuit’s “one-strike-and-you’re-out” approach had no basis in Firestone, which set out a broad standard of deference with no suggestion that it was susceptible to ad hoc exceptions.  The Court further reasoned that, after Glenn, even a Plan Administrator operating under a systemic conflict of interest is still entitled to deferential review; therefore, “a single honest mistake in plan interpretation” does not justify “stripping the administrator of [an ERISA plan of] deference for subsequent related interpretations of the plan.” 

On remand after the Supreme Court decision, the district court addressed the provision at issue in light of the deferential standard endorsed by the Supreme Court.  Applying that deferential standard, the district court stated that it had to defer to the Administrator’s interpretation unless that interpretation was patently unreasonable.  In doing so, the district court determined that the Administrator’s interpretation was a reasonable attempt to apply the Plan in a manner that takes prior distributions in account and is consistent with information previously communicated to plan participants in Plan summaries and restatements. 

The plaintiffs in Frommert argued that the district court should re-enter its original judgment in light of the Supreme Court’s decision in CIGNA Corp. v Amara, 131 S. Ct. 1866 (2011), a case that addressed the effect of statements made in plan summaries, because participants were not adequately informed of the offset to their benefits.  The district court rejected that argument because it concluded that participants were on notice that an offset would be applied to their distributions.  While the communication to participants may have been ambiguous, the court reasoned that it is appropriate to defer to a plan administrator in situations involving such an ambiguity.

This decision affirms that a plan administrator’s interpretation of plan language, even one correcting an earlier mistake, will be overturned only when the interpretation is patently unreasonable.