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Federal Appellate Court Decision Highlights Importance of “Firestone” Language

In a recent decision, the Sixth U.S. Circuit Court of Appeals resolved an important question in a way that should put administrators of ERISA plans in a far stronger position vis-à-vis claimants who disagree with the administrators’ plan interpretations.  The court in Clemons v. Norton Healthcare Retirement Plan held that the contract-interpretation doctrine of “contra proferentum” has no application once a court has determined that a plan document grants the administrator the type of broad discretion approved by the U.S. Supreme Court in its 1989 Firestone decision.

The dispute in Clemons arose when early retirees under Norton’s defined benefit pension plan disagreed with the plan administrator’s calculation of their lump-sum payments.  They filed a class-action lawsuit seeking to have those payments recalculated under their competing interpretation of the plan.  The plan language at issue was certainly convoluted – even for a defined benefit plan – and the competing interpretations were both plausible.  For that reason, both the trial and appellate courts grasped for interpretative tools they could use to resolve the stalemate.

In Firestone Tire and Rubber v. Bruch, the Supreme Court held that, when an ERISA plan document contains language granting the administrator discretion to interpret the terms of the plan, a reviewing court should defer to any interpretation adopted by the administrator that is not arbitrary and capricious.  The parties to the Clemons litigation agreed that the Norton plan contained such “Firestone language.”  As quoted by the court, the plan gave the administrator “the power and discretion . . . to construe all terms, provisions, conditions and limitations of the Plan” and “to determine all questions arising out of or in connection with the provisions of the Plan or its administration in any and all cases . . .”  Not surprisingly, then, the plan administrator argued that the court should defer to its interpretation of the plan’s lump-sum calculation language.

But Ms. Clemons and her colleagues had a rejoinder.  They argued that the court should apply an even older doctrine of contract interpretation to resolve the ambiguity in their favor.  This was the doctrine of “contra proferentum,” which calls for any ambiguity in a document to be resolved against the party who “proffered” (i.e., drafted) the document.  This doctrine is designed to encourage parties to be clear when drafting documents, so as to avoid having any ambiguities construed against them in the event of a later dispute.  Because Norton had drafted the plan (or at least had it drafted), the retirees argued that any ambiguities should be resolved in their favor.

The trial court agreed with the retirees.  After applying both the Firestone doctrine and the doctrine of contra proferentum, that court held in their favor.  In fact, the trial court held that the specific plan provision at issue was sufficiently free from ambiguity as to render the plan administrator’s interpretation arbitrary and capricious.  So even under the Firestone doctrine, the retirees were entitled to prevail.  The contra proferentum doctrine was simply an alternative route to holding in the retirees’ favor.

The plan administrator appealed this holding to the Sixth Circuit.  After conceding that its prior decisions were somewhat in conflict, the Sixth Circuit held that “contra proferentum is inherently incompatible with Firestone deference.”  It even rejected the possibility of relying on contra proferentum to lessen the extent of deference to an administrator’s interpretation (as is sometimes done when an administrator acts under a conflict of interest).

Thus, at least in the Sixth Circuit (which includes the states of Kentucky, Michigan, Ohio, and Tennessee), a plan administrator may avoid the application of the contra proferentum doctrine by ensuring that appropriate Firestone language is incorporated into the plan document.  A reviewing court would still apply the contra proferentum doctrine when determining whether the plan contains Firestone language, but once the court has identified such language, the doctrine ceases to apply.  The court would then defer to the plan administrator’s interpretation of any other disputed plan provision – so long as that interpretation is not arbitrary and capricious.

Note that the contra proferentum doctrine could still apply to any ERISA plan document that does not include Firestone language.  This possibility provides yet a further incentive for the drafter of such a document to include language granting discretionary authority to the plan administrator.  Plan sponsors or administrators who have any question as to whether their plans do include appropriate Firestone language should contact their benefits counsel for further guidance.

This blog post was drafted by Ken Mason, an attorney in the Spencer Fane LLP Overland Park, KS office. For more information, visit spencerfane.com.