Tuesday, March 16, 2010

Of judicial deference and impartial decision-makers: a partial response to the Boston ERISA & Insurance Litigation Blog

Stephen D. Rosenberg, in his Boston ERISA & Insurance Litigation Blog, offers a very nice counterpoint to many of my rants here about the inequities imposed by ERISA. Mr. Rosenberg’s views are thoughtful, well-reasoned and if not ultimately convincing (says I), certainly colorable. Not to mention he displays significantly more erudition than I typically muster; for example, he does not stoop to conjuring childish pejorative apocryphal names for his targets, as I’ve been known to do. Readers who find themselves agreeing with my positions as expressed here can test their conclusions (and my own) by running them through the filter of Mr. Rosenberg’s opposing viewpoints.

There’s much in Mr. Rosenberg’s blog which merits a thoughtful response, but one old post of his is one I’ve been considering for some time now. In January 2008 he posted about the Fourth Circuit case Evans v. Eaton Corp. Long Term Disability Plan, which he rightfully describes as an “elegant and sustained defense of the granting of discretion to administrators and the application of the arbitrary and capricious standard of review under ERISA.” Mr. Rosenberg considers Evans to be, in effect, a challenge to “critics who complain that the Supreme Court should not have established discretionary authority and the corresponding level of review, explaining, among other things, that such review is instead entirely consistent with the purposes and operation of ERISA, as well as with congressional intent.” He closes with a challenge of his own: “critics of arbitrary and capricious review need to confront and provide a persuasive response to the court’s analysis of these issues, if they are going to criticize, with any credibility, the arbitrary and capricious review standards applied by the courts.”


First, I should stress that, speaking for myself at least, the biggest outrage has to do with insurance companies – UNUM, MetLife, Prudential, and their ilk – who unilaterally stick so-called “discretionary” language in their policies, effectively conferring discretion on themselves. As I wrote in a brief I submitted to the First Circuit a couple of years ago:

When an ERISA insurer unilaterally includes discretionary language in a policy, it is doing so patently for its own benefit, and for the benefit of no one else. Therefore, at its very inception its discretionary authority is the result of self-serving conduct which is antithetical to any notion of fiduciary responsibility, and certainly to any notion of “higher-than-marketplace quality standards.” ... In effect and almost certainly by design, the insurer is building in an escape hatch calculated to shield its conduct from any but the most deferential judicial scrutiny, facilitating avoidance of the fiduciary responsibilities it is about to undertake. In this way the insurer seeks to undermine one of the statutory safeguards noted by the Glenn court: judicial review of individual claim denials. ... A structural conflict of interest necessarily takes on significant additional weight where the conflicted insurer has demonstrated the foresight to attempt to insulate its machinations from judicial scrutiny by unilaterally including discretionary language in its policy. When the insurer flouts the Smith-Newton-Rutanen-Kramer principles, and soft-peddles the language’s presence in its dealings with the employer, it takes on even more weight: in that case, added to the mix of conflicted behavior is a troubling inscrutability.

What that means in English is that an insurance company which not only confers discretion on itself in its insurance policy, but fails to be up front that it is doing so when it sells the policy to an employer, knows going in that it is going to be up to no good.

So that’s one objection to deferential judicial review. Here's another: as Mr. Rosenberg points out in another post, people who think like me believe ERISA cases “should be treated and resolved in the same manner as any other type of breach of contract or insurance denial (non-ERISA division) case.” We believe, in sum, that if a claim denial is wrong – just wrong – it should be reversed by a court, instead of being upheld under phony-baloney deferential analysis “even at times when it appears to be incorrect.” Real lives are very significantly impacted by these decisions, and if the decision is incorrect it ought to be corrected.

Let’s start looking, however, at what the Evans court has to say. First, it describes the purpose of deferential review, and indeed standards of judicial review in general:

The purpose of standards of review is to focus reviewing courts upon their proper role when passing on the conduct of other decision-makers. Standards of review are thus an elemental expression of judicial restraint, which, in their deferential varieties, safeguard the superior vantage points of those entrusted with primary decisional responsibility. The clear error standard, for example, protects district courts' primacy as triers of fact. [citation omitted]. AEDPA's reasonableness standards protect state courts' authority over state criminal convictions. [citation omitted]. Chevron deference, like the Administrative Procedure Act's arbitrary-and-capricious and substantial evidence standards, protects agencies' authority in carrying out the missions for which they are created. [citations omitted]. And trust law, to which ERISA is so intimately linked, [citation omitted], uses the abuse of discretion standard to protect a fiduciary's decisions concerning the trust funds in his care. See Restatement (Third) of Trusts § 87 (2007).

Here Evans talks about the “superior vantage points” these “other decision-makers” have as a reason to defer to their reasonable decisions: trial courts have an opportunity to hear testimony and observe witness demeanor which appellate courts lack; government agencies develop expertise in the issues they consider from day-to-day which judges, generalists that they necessarily are, lack; and trustees, at least presumably, have more intimate knowledge of the trustor’s wishes, or institutional expertise in managing trust benefits, which similarly gives them an advantage over courts coming to a dispute cold.

But this perceived gap in expertise is not – cannot be – the whole enchilada, since experts can also be crooks. So it’s Sesame Street time. Which of these things is not like the others?

Let’s see: district courts, state courts, government agencies, trustees, ERISA insurance companies. Well the first four are, you know, impartial adjudicators of disputes to which they are not themselves parties – federal and state courts, government agencies, and trustees (who, based on the trustor's designation, exercise discretion to pay out funds provided by a trustor and to which the trustee has no claim for its own benefit).

The fifth, ERISA insurers, are profit-driven entities which realize a direct benefit to their own bottom line every time they deny a claim. And when an ERISA dispute goes to court, under deferential review the impartial court has to give deference to the insurer, who is a party to the very dispute its decision brought about. This is the crux of the concern about ERISA’s deferential review: it’s a requirement that a court have a thumb on the scale in favor not of the decision of another impartial (and presumably expert) decision-maker, but of a party to the very dispute in question.

So the Evans court’s account of the purpose of deferential review – to “focus reviewing courts upon their proper role when passing on the conduct of other decision-makers” – makes sense when that “other decision-maker” is itself impartial and uninterested in the outcome of the underlying dispute. Don’t take my word for it: here’s James Madison, in Federalist Papers number 10:

No man is allowed to be judge in his own cause; because his interest would certainly bias his judgment, and, not improbably, corrupt his judgment.

But what does he know?

We’ll come back to this later, as the Evans court, and Mr. Rosenberg’s blog, offer other observations which deserve a response.

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