In a seminal appellate decision, the Ninth Circuit defined the parameters of the “surcharge” and “reformation” remedies that were offered up by the United States Supreme Court in CIGNA Corp. et al. v. Amara et al., 131 S. Ct. 1866 (2011) (pdf.) as potential relief under ERISA Section 502(a)(3).  In Amara, the Supreme Court ruled that a Summary Plan Description, or “SPD,” is not a “Plan” subject to enforcement under ERISA Section 502(a)(1)(B).  The Supreme Court posited, however, that an employer’s issuance of an intentionally misleading SPD might be remedied under ERISA Section 502(a)(3), under the equitable doctrines of estoppel, reformation, and/or surcharge.

In Skinner et al. v. Northrop Grumman Retirement Plan B et al., No. 10-55161 (9th Cir. Mar. 16, 2012) (pdf.), the Ninth Circuit became the first Circuit Court of Appeals to clarify the contours of the reformation and surcharge remedies.  The case involved an ambiguity in an SPD that had been issued to retirees (by a predecessor of Northrop).  The ambiguity involved the definition of an “annuity equivalent offset” that was used to reduce annual benefit amounts payable to retirees based on the age of retirees at retirement.  However, the plaintiffs in Skinner admitted that they had not relied on the SPD in making their retirement decisions.  Rather, each had received accurate descriptions of the annuity equivalent offset, including in the pension calculation packets they received in anticipation of their retirements.  

Trust or Contract Principles?

The plaintiffs in Skinner acknowledged that they had never relied on the ambiguity in the SPD and, therefore, that estoppel was not an appropriate remedy. The Ninth Circuit took them at their word, and did not analyze the nuts and bolts of the estoppel remedy.  In analyzing the reformation and surcharge remedies, the Ninth Circuit declined to address whether those doctrines should be analyzed under trust or contract principles.  Instead, it analyzed them under both, finding that neither doctrine provided a remedy under either trust or contract principles.

Reformation

Under contract law, reformation is only appropriate where the contracting parties make a mutual mistake or where fraud is afoot.  Under trust law, reformation is only appropriate where the drafter makes a mistake in drafting the trust instrument (here, the Plan), and there is evidence of the drafter’s actual intent. 

The Ninth Circuit rejected the plaintiffs’ fraud allegation for two reasons.  First, there was no evidence that the employer acted with an intent to mislead anyone.  Second, the plaintiffs acknowledged that they had not relied on the ambiguity, and reliance is a necessary component of fraud.

The Ninth Circuit also found that there was no evidence that the Plan document was mistaken in any way, even though the SPD and the Plan document were potentially in conflict with each other.  The court specifically rejected the argument that an error or ambiguity in the SPD could constitute evidence of the drafter’s true intent.  Although not expressly stated in the Ninth Circuit’s decision, its conclusion is consistent with the notion that SPDs and Plan documents are drafted by different ERISA “people.”  The SPD is drafted by the Plan Administrator, and the Plan itself is drafted by the Plan Sponsor.  Even if they are the same entity (they are often both the employer), the employer wears different hats when it drafts the two documents.

Surcharge

According to the Ninth Circuit, surcharge is available where:  (i) the fiduciary gains a benefit from its breach; and/or (ii) the breach causes a loss of value or profits to the trust.  In the first scenario, the trustee must disgorge any profits to the beneficiaries.  Where the breach causes loss to the trust, the Ninth Circuit explained, relief may be available to return the trust (and consequently, its beneficiaries) to its status pre-breach.  The Ninth Circuit rejected the surcharge remedy in this particular case, finding that there was no evidence that the ambiguity in the SPD resulted in the plan administrator reaping a benefit.  The Ninth Circuit also found that the participants were not entitled to compensation because they suffered no harm, since none relied on the ambiguity in the SPD.  The court rejected the plaintiffs’ argument that they suffered “harm” by being deprived of a statutory right to an accurate SPD, reasoning that such a construction would render fiduciaries strictly liable for every mistake in an SPD. 

Lessons Learned . . .

Skinner is a welcome decision for plan fiduciaries.  It is, however, only the first appellate opinion on the subject post-Amara.  Additionally, the facts of the case were not particularly compelling for the plaintiffs, since they received accurate information before making their retirement decisions and thus never relied on the faulty SPD.  Undoubtedly other courts will tackle the issue of ERISA remedies in the coming months.  In the meantime, however, employer/plan administrators should continue to subject their plan documents and benefits communications to a careful review to ensure their accuracy and clarity.  Skinner teaches that, in the context of benefit communications, an ounce of prevention is truly worth a pound of cure.