HR Management & Compliance

Supreme Court Rules for Employer in Benefits Case

By David R. Godofsky

Yesterday’s U.S. Supreme Court ruling in Conkright v. Frommert rejects the “one-strike-and-you’re-out” rule, awarding a home run to Xerox as sponsor of a defined benefit pension plan.

The Conkright case arose when Frommert and other employees brought a claim for benefits. The employees contended that the method Xerox used to compute their benefits was an unreasonable interpretation of the plan and that Xerox had not given them sufficient notice of the method. The plan administrator denied their claims, and Frommert sued.

The Second Circuit Court of Appeals sided with Frommert, holding that the computation method used by Xerox was unreasonable. The plan administrator then adopted another interpretation, which gave Frommert (and the others) additional benefits, but still not as much as they’d wanted. The trial court declined to defer to the plan administrator’s new interpretation, instead awarding the employees their requested benefit amount. Upon appeal, the Second Circuit affirmed the trial court’s decision, and the matter went before the Supreme Court.

The question before the Supreme Court was whether a court should defer to the plan administrator’s second interpretation after the first interpretation has already been rejected. In a 5-3 opinion (with Justice Sotomayor declining to participate), the high court held that, even after rejecting the first interpretation, the court should still give deference to the plan administrator’s second interpretation. In the majority opinion, Chief Justice Roberts notes that a “single honest mistake” isn’t enough to strip the plan administrator of its authority to interpret the plan.

The practical implications of this decision are profound. The plan administrator’s position in litigation is greatly strengthened, provided the Court perceives its position to be adopted in good faith. In that case, even if the employee persuades a court that the plan administrator’s position is unreasonable and wrong, the risk to the plan of a wildly costly interpretation is greatly lessened. Because the employer has a significant opportunity to mitigate risk, the pressure to settle is diminished. Further, the employer has a much greater opportunity to reach a reasonable position, even after an initial loss in court.

David Godofsky is the leader of Alston & Bird LLP’s Employee Benefits & Executive Compensation Group.

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