Rulings clears up attorney fees in ERISA cases

Litigation is expensive, and that fact is not surprising. It follows that a party contemplating filing a lawsuit must think carefully about the costs of the endeavor, including attorney fees. In the U.S., each party is generally held responsible for its own attorney fees regardless of the outcome of the litigation. This concept is referred to as the "American Rule." Unlike its English counterpart, the American Rule does not award attorney fees as an element of damages. However, like many rules, the American Rule has distinct exceptions: Each party pays its own fees, except where a statute or contract provides otherwise. One such statutory exception occurs under the Employee Retirement Income Security Act of 1974. The 9th Circuit's recent opinion in Micha v. Sun Life Assurance of Canada, Inc., 2017 DJDAR 10411 (Nov.1, 2017), resolved any lingering questions regarding the scope of conduct considered in awarding attorney fees for appellate work under ERISA.

Under ERISA, it is within the court's discretion to award reasonable attorney fees and costs in any action by a participant, beneficiary or fiduciary. See 29 U.S.C. Section 1132(g)(1). For ERISA plan participants, beneficiaries and fiduciaries, this ability to recover attorney fees is critical. Unlike a state law claim for benefits under an individual insurance policy, an ERISA claim for benefits generally limits recovery to benefits due under the plan, prejudgment interest, declaratory or equitable (non-monetary) relief, and attorney fees. Accordingly, ERISA's real financial disincentive to engage in an unfair claims handling process lies in the threat of looming attorney fees. Generally, the prevailing party is presumed entitled to attorney fees, so long as the circumstances do not result in an unjust award. See United Steelworkers of Am. v. Ret. Income Plan for Hourly-Rated Emps. of ASARCO, Inc., 512 F.3d 555, 564 (9th Cir. 2008). However, a party does not need to "prevail" to be entitled to an award of attorney fees, the court may award fees so long as the party achieves at least some degree of success on the merits. See Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242, 253-54 (2010).

But, when is it appropriate to award attorney fees for appellate work in an ERISA case? In the 9th Circuit, an award of attorney fees relies on the five Hummell factors: (1) the degree of culpability or bad faith; (2) the ability to pay; (3) deterrence; (4) the significance of legal issue/benefit to all plan participants; and (5) the relative merits of the parties' positions. See Hummell v. S.E. Rykoff & Co., 634 F.2d 446 (9th Cir. 1980). In Micha, the 9th Circuit directly addressed the relevant scope of conduct when applying those factors, ultimately deciding an award of appellate attorney fees requires an examination of conduct throughout the entire course of litigation, including an insurer's pre-appeal conduct.

The underlying dispute involved Dr. John Paul Micha's claim for disability benefits under an employer-sponsored, group long-term disability benefits plan. Sun Life Assurance Company handled Micha's claim and ultimately denied disability benefits. Micha filed suit, alleging that Sun Life engaged in a pattern of misconduct "designed to permit the company to avoid learning certain details about the Plaintiff's condition that would require it to find him disabled under the policy." Group Disability, as a co-defendant, admitted to Micha's allegations and filed a cross-claim against Sun Life for comparative fault and indemnification. Sun Life offered to indemnify Group Disability only if it agreed to waive any potential conflict of interest. Group Disability refused the conditional indemnification and so the two parties acted independently in the litigation. Ultimately, Sun Life settled and paid a significant portion of Micha's attorney fees.

Upon resolution of the underlying claim for disability benefits, Group Disability brought its own motion for attorney fees. The district court awarded Group Disability's attorney fees based in part on its decision to align with the Micha's interests. Sun Life appealed and the 9th Circuit affirmed the award. Sun Life petitioned for writ of certiorari to the U.S. Supreme Court, asserting that the ruling had broad implications, not just for ERISA attorney fees, but fee-shifting provisions in general. The Supreme Court denied Sun Life's petition.

Group Disability brought a second motion for fees in the district court, this time requesting its appellate attorney fees under ERISA. The district court denied the request for appellate attorney fees based on its application of the five Hummell factors. In its analysis, the district court failed to consider Sun Life's pre-appeal conduct despite having "serious concerns regarding Sun Life's handling of Micha's claim for disability benefits." Ultimately, the district court concluded that (1) Sun Life did not act in bad faith in its decision to appeal the original attorney fees award on a novel legal issue; (2) Sun Life could pay, but that factor alone was not determinative; (3) the decision to award attorney fees had limited deterrent effect because Sun Life's did not appeal in bad faith and Micha's facts were unique and unlikely to be repeated; (4) the fee request alone did not implicate a significant plan-wide legal benefit or novel legal issue; and (5) relative merits weighed slightly in favor of Group Disability, although Sun Life appealed debatable legal arguments on a novel ERISA issue. As the 9th Circuit noted, it "should be clear from a recitation of the district court's reasoning" that it analyzed the Hummell factors based exclusively on Sun Life's actions and arguments on appeal, ignoring Sun Life's conduct in the underlying suit for disability benefits.

The 9th Circuit reversed, finding that a proper application of the Hummell factors required an evaluation of the full course of litigation, as compelled by its decision in Sokol v. Bernstein, 812 F.2d 559, 561 (9th Cir. 1987). Consequently, the district court erred when it failed to consider Sun Life's pre-appeal conduct. In addressing the district court's error, the court reapplied the factors "in light of all of Sun Life's conduct, from its wrongful denial of Micha's claim to its filing of a petition for a writ of certiorari." Under this revised analysis, the factors weighed strongly in favor of Group Disability. First, degree of culpability or bad faith strongly favored an award because Sun Life's underlying wrongful denial of disability benefits forced Group Disability into litigation. Second, the court agreed with the district court's determination of Sun Life's ability to pay, but found the factor insufficiently weighted. According to precedent, defendant's ability to pay should strongly weigh in favor of a fee award. See Smith v. CMTAIAM Pension Trust, 746 F.2d 587, 590 (9th Cir. 1984). Third, an attorney fees award not "backed up by an award of appellate fees" insufficiently deters an ERISA defendant's bad faith conduct and will not deter marginal appeals after a misconduct-based denial. Fourth, the court found it inconsistent that the district court noted little practical significance in the legal result of the appeal, as it directly contradicted Sun Life's vigorous appellate advocacy. As to the fifth factor, the court found it properly applied in favor of Group Disability, as the party that prevailed on appeal.

Remarkably, Sun Life's aggressive appellate pursuit of the initial attorney fees award resulted in a much further reaching decision on appellate attorney fees under ERISA. Now, an insurer's poor claims-handling process and wrongful denial will follow it throughout the course of litigation. Although the scope of relevant conduct was not a matter of significant dispute prior to Micha, the 9th Circuit's clear ruling on the matter resolves any lingering questions as to what behavior will be considered when applying the Hummell factors to an award of appellate attorney fees. With this decision, the 9th Circuit correctly made it easier for ERISA plan participants and their beneficiaries to recover attorney fees in ERISA cases. This is vitally important since they do not enjoy other remedies that claimants who have state law-governed claims enjoy.