CONNIE J. EDMONSON, individually and on behalf of all others similarly situated
LINCOLN NATIONAL LIFE INSURANCE COMPANY
Argued November 13, 2012
On Appeal from the United States District Court for the Eastern District of Pennsylvania D.C. Civil Action No. 2-10-cv-04919 (Honorable Michael M. Baylson)
M. Scott Barrett, Esq. Barrett & Associates John C. Bell, Jr., Esq. (ARGUED) Lee W. Brigham, Esq. Bell & Brigham Jeffrey G. Casurella, Esq. Cary L. Flitter, Esq. Flitter Lorenz Counsel for Appellant Connie J. Edmonson.
David H. Pittinsky, Esq. (ARGUED) Joel E. Tasca, Esq. Ruth S. Uselton, Esq. Ballard Spahr Counsel for Appellee Lincoln National Life Insurance Company.
Waldemar J. Pflepsen, Jr. Esq. Jorden Burt Counsel for Amicus Curiae American Council of Life Insurers.
Before: SCIRICA, FISHER, and JORDAN, Circuit Judges.
SCIRICA, Circuit Judge.
Plaintiff Connie Edmonson was a beneficiary of a life insurance plan established by her employer and governed by the Employee Retirement Income Security Act of 1974 (ERISA). Defendant Lincoln National Life Insurance Co. chose to pay her benefits using a retained asset account, which allowed it to hold onto the benefits and invest them for its own profit until Edmonson affirmatively chose to withdraw them from the account.
Edmonson claims Lincoln breached its fiduciary duty of loyalty under ERISA and seeks disgorgement of the profit Lincoln earned by investing the benefits owed to her. The District Court granted summary judgment in Lincoln's favor, concluding Lincoln was not acting in a fiduciary capacity when it took the actions subject to complaint. We will affirm.
Connie Edmonson's husband was insured under a group life insurance policy issued by Lincoln. The policy was established under an ERISA employee benefit plan sponsored by Edmonson's employer, Schurz Communications. When her husband died, Edmonson was entitled to $10, 000 in benefits. The policy states, "[u]pon receipt of satisfactory proof of a Dependent's death while insured under this Policy, the Company will pay the amount of the Dependents [sic] Life Insurance in effect on the date of such death, " and that "[a]ny benefits payable under this Policy will be paid immediately after the Company receives complete proof of claim." The policy does not state that Lincoln will pay the benefits using a retained asset account and does not otherwise specify how Lincoln was to pay Edmonson the benefits.
Edmonson submitted a claim form to Lincoln for payment. The form stated that when the benefits are greater than $5, 000, Lincoln's usual method of payment is to open a SecureLine Account in the beneficiary's name. After Lincoln approved Edmonson's claim, it set up a SecureLine Account in her name in the amount of $10, 000, and sent her a checkbook from which she could draw checks on the account. Lincoln explained to Edmonson that she would receive interest on the account in the amount of the Bloomberg national average rate for interest-bearing checking accounts plus 1%. Lincoln also explained that if Edmonson wanted the entire proceeds immediately, all she had to do was write one check for the entire balance.
The SecureLine Account was a retained asset account. When distributing benefits using retained asset accounts, an insurance company does not deposit any funds into the account. Rather, it merely credits the account with the benefits, and when a beneficiary writes a check on the account, the insurance company transfers funds into the account to cover the check. Until that time, the insurance company retains the money owed to the beneficiary (the "retained assets"), and can invest the retained assets for its own profit.
Three months after Lincoln set up the SecureLine Account, Edmonson withdrew the full amount of the insurance proceeds. Lincoln wrote her a check for $52.33 of interest. Edmonson contends that the profit Lincoln earned from investing the retained assets was greater than the amount of interest paid to her, and that Lincoln made approximately $5 million in profit in 2009 by investing retained assets credited to her account and the accounts of other beneficiaries.
Edmonson brought an ERISA claim contending Lincoln violated its fiduciary duties under ERISA by choosing to pay her using a retained asset account and by investing the retained assets for its own profit. She contends ERISA's fiduciary duties were implicated because both acts involved exercising "discretionary authority or discretionary control respecting management" or "administration" of an ERISA plan and exercising "authority or control respecting management or disposition of [plan] assets." 29 U.S.C. § 1002(21)(A) (setting forth the various functions that trigger ERISA fiduciary duties). She argues Lincoln's acts breached its fiduciary duties because these actions were not taken for her exclusive benefit and because they involved self-dealing. See id. § 1104(a)(1) ("[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries."); id. § 1106(b)(1) ("A fiduciary with respect to a plan shall not . . . deal with the assets of the plan in his own interest or for his own account."). Edmonson seeks disgorgement of the profits earned by Lincoln from the investment of the retained assets under 29 U.S.C. § 1132(a)(3), which allows a participant, beneficiary, or fiduciary to obtain equitable relief to redress violations of ERISA.
Lincoln moved to dismiss, arguing Edmonson lacked both constitutional and statutory standing to bring her claim. It also argued it was not acting as a fiduciary under ERISA when it took the actions subject to complaint and, even if it were, it did not breach any fiduciary duty by taking these actions. See Edmonson v. Lincoln Nat'l Life Ins. Co., 777 F.Supp.2d 869, 876 (E.D. Pa. 2011). The trial court rejected all of Lincoln's arguments. Id. at 874. The court first concluded Edmonson had standing under Article III because she suffered an injury-in-fact based on the amount of the spread between the interest Lincoln paid to her and the profit it earned by investing the retained assets. Id. at 881. The court then concluded Edmonson had statutory standing under ERISA, rejecting Lincoln's argument that Edmonson was no longer a "beneficiary" of an ERISA plan once the SecureLine Account was closed. Id. at 883. Finally, the court concluded Edmonson had sufficiently alleged that Lincoln breached its fiduciary duties under ERISA. Id. at 892.
Following discovery, Lincoln moved for summary judgment on the ground that it was not a fiduciary under ERISA when it took the contested actions. Edmonson moved for partial summary judgment on the same issue. Edmonson also moved to certify a class of individuals who were paid ERISA benefits by Lincoln via a retained asset account. The court granted Lincoln's motion for summary judgment, denied Edmonson's motion for partial summary judgment, and dismissed as moot Edmonson's motion for class certification. Edmonson v. Lincoln Nat'l Life Ins. Co., 899 F.Supp.2d 310, 313 (E.D. Pa. 2012). The court concluded Lincoln's actions were not governed by ERISA fiduciary duties because the acts did not involve the administration or management of the plan and did not involve exercising authority or control over plan assets. Edmonson appeals, contending the court erred with respect to both conclusions.
II. ERISA's Fiduciary Principles
"'ERISA is a comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans.'" Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 137 (1990) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983)). To protect participants in employee benefit plans and their beneficiaries, ERISA "'establish[es] standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans.'" Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 44 (1987) (quoting 29 U.S.C. § 1001(b)). ERISA defines the circumstances under which a person or entity is a fiduciary, sets forth the duties of these fiduciaries, and provides various causes of action designed to promote the enforcement of these duties.
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
29 U.S.C. § 1002(21)(A). "'ERISA . . . defines 'fiduciary' not in terms of formal trusteeship, but in functional terms of control and authority over the plan.'" In re Unisys Corp. Retiree Med. Benefits ERISA Litig., 579 F.3d 220, 228 (3d Cir. 2009) (alteration and emphasis in original) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993)). "Accordingly, '[f]iduciary duties under ERISA attach not just to particular persons, but to particular persons performing particular functions.'" Id. (alteration in original) (quoting Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1158 (3d Cir. 1990)). The definition of a fiduciary under ERISA is to be broadly construed. Curcio v. John Hancock Mut. Life Ins. Co., 33 F.3d 226, 233 (3d Cir. 1994) (citing Smith v. Hartford Ins. Grp., 6 F.3d 131, 141 n.13 (3d Cir. 1993)).
Among other duties, ERISA requires that a fiduciary "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries." 29 U.S.C. § 1104(a)(1). ERISA further requires that "[a] fiduciary with respect to a plan shall not . . . deal with the assets of the plan in his own interest or for his own account." Id. § 1106(b). At least in one respect, these duties can be characterized as a fiduciary's duty of loyalty.
Edmonson contends Lincoln was acting as a fiduciary both when it chose to pay her using a retained asset account and when it later invested the retained assets for its own profit. She argues both acts were constrained by fiduciary duties because the acts involved the management or administration of the plan, or alternatively, because the acts involved exercising authority or control over plan assets. Lincoln argues that it was no longer acting as an ERISA fiduciary when it took the challenged acts and, alternatively, that these acts did not breach its duty of loyalty.
ERISA provides for private enforcement of its duties by creating causes of action available to participants, beneficiaries, and fiduciaries. Edmonson brings her disgorgement claim under 29 U.S.C. § 1132(a)(3), which allows a participant, beneficiary, or fiduciary to bring a cause of action "(A) to enjoin any act or practice which violates any provision of [ERISA] or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [ERISA] or the terms of the plan." The Supreme Court has described §1132(a)(3) as a "catchall" provision which "act[s] as a safety net, offering appropriate equitable relief for injuries caused by violations that §  does not elsewhere adequately remedy." Varity Corp. v. Howe, 516 U.S. 489, 512 (1996) (quotation omitted).
On appeal, amicus American Council of Life Insurers argues Edmonson lacks standing to bring her claim because she suffered no injury-in-fact, as she received all the benefits owed to her under the policy, plus interest. The District Court rejected this argument, concluding Lincoln's failure to pay Edmonson the full amount of the profit it earned from investing the retained assets constituted for standing purposes an injury-in-fact. The court concluded Edmonson's injury was the "spread" between the interest Lincoln earned by investing the retained assets and the interest it paid to her. Edmonson, 777 F.Supp.2d at 881. The court rejected Lincoln's argument that Edmonson suffered no injury merely because she received all she was entitled to under the plan and policy. See id.
Although Lincoln did not appeal this ruling, "federal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press." Henderson ex rel. Henderson v. Shinseki, 131 S.Ct. 1197, 1202 (2011). We review the legal conclusions related to standing de novo, "but review for clear error the factual elements underlying the District Court's determination of standing." Gen. Instrument Corp. v. Nu-Tek Elecs. & Mfg., 197 F.3d 83, 86 (3d Cir. 1999).
Article III of the United States Constitution "limits the jurisdiction of federal courts to 'Cases' and 'Controversies.'" Lujan v. Defenders of Wildlife, 504 U.S. 555, 559 (1992). "Courts enforce the case-or-controversy requirement through the several justiciability doctrines that 'cluster about Article III.'" Toll Bros., Inc. v. Twp. of Readington, 555 F.3d 131, 137 (3d Cir. 2009) (quoting Allen v. Wright, 468 U.S. 737, 750 (1984)). These doctrines "include standing, ripeness, mootness, the political-question doctrine, and the prohibition on advisory opinions." Id. Standing is "perhaps the most important of these doctrines." Allen, 468 U.S. at 750.
"[T]he irreducible constitutional minimum of standing contains three elements." Lujan, 504 U.S. at 560. First, the plaintiff must suffer an injury-in-fact that is concrete and particularized and actual or imminent, as opposed to conjectural or hypothetical. Id. Second, "there must be a causal connection between the injury and the conduct complained of—the injury has to be 'fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.'" Id. (alterations in original) (quoting Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 41-42 (1976)). "Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision." Id. (quotation omitted).
We begin with the first requirement, injury-in-fact. Generally, disgorgement claims for breach of fiduciary duty do not require that a plaintiff suffer a financial loss, as relief in a disgorgement claim "is measured by the defendant's profits." Restatement (Third) on Restitution and Unjust Enrichment § 51 cmt. a (2011); see also id. § 43 cmt. d (stating a claim based on a breach of the duty of loyalty may be brought "without regard to economic injury"); id. (providing examples where fiduciary is liable for gains even though plaintiff suffered no loss). This is because disgorgement claims seek not to compensate for a loss, but to "deprive wrongdoers of ill-gotten gains." Commodity Futures Trading Comm'n v. Am. Metals Exchange Corp., 991 F.2d 71, 76 (3d Cir. 1993) (quotation omitted). See S.E.C. v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993) ("[D]isgorgement is . . . an equitable remedy meant to prevent the wrongdoer from enriching himself by his wrongs . . . ." (citations omitted)). A requirement of a net financial loss would allow fiduciaries to retain ill-gotten profit—exactly what disgorgement claims are designed to prevent—so long as the breaches of fiduciary duty do not harm the plan or beneficiaries. Accordingly, the nature of disgorgement claims suggest that a financial loss is not required for standing, as a loss is not an element of a disgorgement claim.
The principles of ERISA provide further support for this conclusion. ERISA's duty of loyalty bars a fiduciary from profiting even if no loss to the plan occurs. Under 29 U.S.C. § 1109(a), ERISA provides that plans can recover that profit whether or not the plan suffered a financial loss. See Leigh v. Engle, 727 F.2d 113, 122 (7th Cir. 1984) ("ERISA clearly contemplates actions against fiduciaries who profit by using trust assets, even where the plan beneficiaries do not suffer direct financial loss."). "The purpose behind this rule is to deter the fiduciary from engaging in disloyal conduct by denying him the profits of his breach." Amalgamated Clothing & Textile Workers Union v. Murdock, 861 F.2d 1406, 1411 (9th Cir. 1988) (citing G. Bogert and G. Bogert, The Law of Trusts and Trustees § 543, at 218 (2d ed. 1978)).
Notwithstanding these principles, the amicus contends our decision in Horvath v. Keystone Health Plan East, Inc., 333 F.3d 450 (3d Cir. 2003), requires a plaintiff to show a financial loss in order to have standing to bring a disgorgement claim. The plaintiff's claim in Horvath was that her HMO failed to disclose details of cost-control incentives offered to participating physicians, and thus violated ERISA's duty to make full disclosures. She sued for restitution, disgorgement, and an injunction barring the defendant from omitting information regarding physician incentives from its disclosures to plan members. Id. at 455. We first concluded the plaintiff did not need to "demonstrate actual harm in order to have standing to seek injunctive relief." Id. at 456. But because her claims for restitution and disgorgement sought monetary relief for herself, as opposed to the plan, we concluded those claims "are individual in nature and therefore require her to demonstrate individual loss." Id. (citing In re Unisys Sav. Plan Litig., 173 F.3d 145, 159 (3d Cir. 1999)). She acknowledged, however, she had suffered no direct financial loss and conceded "that the care and coverage she received as a member of the [HMO] was never affected by the existence of physician incentives." Id. Instead, she contended her injury was that her firm overpaid for the healthcare she received and that, absent the breach, the firm would have passed any savings on to her. Id. We rejected this "diminished value" theory of injury as a means to satisfy the injury-in-fact requirement. Id. at 456-57. We also concluded the plaintiff's theory was "far too speculative to serve as ...