A recent ruling by the Sixth Circuit Court of Appeals acts as an important reminder to ERISA plan sponsors that reserving the written right to interpret plan documents may be critical in interpreting otherwise ambiguous language.
The Firestone Language
In the 1989 case Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the United States Supreme Court conclude that an ERISA plan administrator’s decision will be reviewed under a de novo (i.e., without deference) standard, unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe terms of the plan. Since then, many plan administrators are sure to incorporate the so-called “Firestone language” in plan documents that explicitly grants the plan administrator such authority. With Firestone language, courts have typically granted a much more lenient “arbitrary and capricious” standard of review.
The Norton Healthcare Challenge to Firestone Language
In 2013, a Kentucky federal judge found that Norton Healthcare, Inc. shortchanged early retirees’ pensions and ordered the company to recalculate their monthly retirement income and lump-sum benefits, based on unclear plan language. That court held that the common-law doctrine of contra proferentum should apply. That is a doctrine of contractual interpretation providing that, where a promise, agreement or term is ambiguous, the preferred meaning should be the one that works against the interests of the party who drafted the contract. In other words, the plan language should be interpreted against the plan sponsor.
In May, a three-judge panel on the Sixth Circuit Court of Appeals reversed that decision, ruling that the Firestone language overrides and is otherwise incompatible with the doctrine of contra proferentum. Therefore, so long as the plan sponsor has reserved the authority to construe the terms of the plan, they will not be subject to a challenge based on contra proferentum. See Clemons v. Norton Healthcare Inc. Ret. Plan, 2018 WL 2142640 (6th Cir. 2018).
While there is some inherent difficulty in drafting clear and concise plan language (especially when dealing with complex benefits), it is always to the plan sponsor’s advantage to include Firestone language in the plan document. Doing so will help mitigate against plaintiffs who might otherwise be able to use ambiguous language to their advantage.
About the Author:
Eric W. Gregory is an Associate in Dickinson Wright’s Troy office where he assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and nonqualified compensation programs. Eric can be reached at 248-433-7669 or email@example.com and you can visit his bio here.