DOCTOR’S GENDER DISCRIMINATION SUIT FAILS BECAUSE SHE COULD NOT PROVE SHE WAS “SIMILARLY SITUATED” TO MALES WHO WERE NOT FIRED

The Sixth Circuit Court of Appeals recently ruled that a Vanderbilt University medical professor had not proven that she was treated less fairly because of her gender and upheld the district court’s summary judgment in Vanderbilt’s favor based on its determination that she had failed to identify suitable male comparators and because she failed to make out a prima facie case of gender discrimination.

In Simpson v. Vanderbilt University, No. 16-5381 (6th Cir. May 22, 2017), plaintiff Jean Simpson was a professor in the Vanderbilt Medical School and was employed by the medical school and the Vanderbilt Medical Group. While she was employed, she started, ran and solicited clients for her own private medical practice, actions which Vanderbilt believed were in violation of its conflicts of interest policy, among other policies. After trying unsuccessfully to resolve the matter, Vanderbilt terminated her employment and she filed suit alleging violations of both Title VII of the Civil Right Act and the Tennessee Human Rights Act because of her gender. As noted, the district court granted summary judgment to Vanderbilt and Simpson appealed.

Dr. Simpson began her employment at Vanderbilt in 1997 and at the time of her termination, she was a full-time faculty member in the Division of Anatomic Pathology, which formerly included a dedicated breast pathology consult service. That dedicated service was eliminated in 2012 and general surgical pathology took over the practice. While the reorganization was still pending, Simpson began her own company, Breast Pathology Consultants, Inc. (“BPC”), which provided services that were virtually identical to the dedicated breast pathology consult service, and without Vanderbilt’s knowledge, began actively soliciting pathologists for whom she had previously provided services offering them services through her company. During this time, she continued to be a Vanderbilt employee but from February 2012 through October 2013, she collected nearly $250,000 in fees through her company in addition to her Vanderbilt salary.

In the summer of 2012, Vanderbilt discovered Simpson’s arrangement with BPC, and over the next year repeatedly informed her that she was violating the medical group’s conflict of interest policy, among other things, and demanded that she cease her work through BPC or face possible disciplinary action, including termination. She eventually filed an updated conflict disclosure form in which she disclosed her work with BPC but she otherwise denied that her activities conflicted with Vanderbilt and claimed that several male colleagues had engaged in similar activity and were allowed to maintain their outside practices.

Vanderbilt appointed a faculty committee that investigated the claims and determined that Simpson’s conduct violated the conflict of interest policy and also constituted neglect of duty. It recommended that Simpson be fired for cause and be forced to return the payments she received through her outside business. She was offered the option of resigning in lieu of termination if she paid Vanderbilt the funds she earned from her business, which she refused to do. After she was terminated for cause, she filed her lawsuit alleging violations of both Title VII and the Tennessee Human Rights Act based on gender discrimination. The district court granted summary judgment in favor of Vanderbilt because it determined that she failed to make out a prima facie case under the McDonnell Douglas burden-shifting framework and that even if she had, she failed to demonstrate that the stated reason for her termination was a pretext.

In reviewing the district court’s ruling, the Sixth Circuit first noted that to make out a prima facie case under McDonnell Douglas, a plaintiff must demonstrate that: 1) she is a member of a protected class; 2) she was subjected to an adverse job action; 3) she was qualified for the position; and 4) similarly situated male employees were treated more fairly. Because the parties agreed that she met the first three criteria, the appeals court confined its analysis of the district court’s ruling to addressing the “similarly situated” prong. It stated that in order for a person to be considered a similarly situated comparator, Simpson needed to prove that all the relevant aspects of her employment situation were “nearly identical” to those of the cited male employees. As an example, it stated that “similarly situated” in an employment context means that comparators must have dealt with the same supervisor, been subjected to the same standards and have engaged in similar conduct without differentiating or mitigating circumstances.

Dr. Peter Donofrio, the comparator that Simpson attempted to use, worked briefly for the “Best Doctors” website while he was a Vanderbilt employee and disclosed that work on his 2011 conflict of interest form. After he disclosed this work, Vanderbilt instructed him to cease his engagement with the website. While he initially complied, he resumed his work with Best Doctors in 2012, which Vanderbilt learned about during discovery in this matter. Vanderbilt conducted a disciplinary review as a result and while he was not terminated, he was required to pay $122,000 in fees to Vanderbilt and was put on two-years’ probation. As such, the court determined that his case was clearly different from Simpson’s since at a minimum, Dr. Donofrio ceased working when confronted and paid back the tainted earnings. The court further found that the additional male doctors she referenced were also not similarly situated because they had primarily been granted permission by Vanderbilt, after disclosure, to earn outside income as they transitioned either to retirement or private practice.

Based on the above, the Sixth Circuit affirmed the trial court’s summary judgment decision as it agreed that Simpson had failed to meet the fourth McDonnell Douglas factor.

STATE COURTS MUST PLACE ARBITRATION AGREEMENTS ON EQUAL FOOTING WITH ALL CONTRACTS, JUST LIKE FEDERAL COURTS

In Kindred Nursing Ctrs. P’ship v. Clark, 581 U.S. –, 2017 U.S. LEXIS 2948 (May 15, 2017), the Supreme Court reiterated its long-standing position that any laws that single out arbitration agreements for disfavored treatment run afoul of the Federal Arbitration Act’s requirement, at 9 U.S.C. § 2, that courts must place such agreements “on equal footing with all other contracts” and reversed the decision of the Kentucky Supreme Court.

The case before the Court was a consolidation of two separate cases that had been decided in Kentucky state court. Beverly Wellner and Janis Clark were the wife and daughter, respectfully, of Joe Wellner and Olive Clark, two deceased former residents of a nursing home owned by Kindred. Both held a power of attorney for their respective relatives and both of those powers of attorney granted them broad powers. The Wellner POA gave Beverly the authority to, among other things, institute legal proceedings and make “contracts of every nature in relation to both real and personal property.” The Clark POA provided Janis with full power to transact, handle and dispose of all matters affecting Olive’s estate and to “draw, make, and sign in my name any and all . . . contracts, deeds or agreements.” When both Joe and Olive moved into the Kindred facility in 2008, Beverly and Janis both signed the necessary paperwork pursuant to their POAs, including identically-worded arbitration provisions that stated: “any and all claims or controversies arising out of or in any way relating to . . . the Resident’s stay at the Facility” would be resolved through binding arbitration.

Both Joe and Olive died in the next year and Beverly and Janis filed separate suits in Kentucky state court making the same basic claim, that is, that Kindred’s substandard care had caused both deaths and Kindred filed motions to dismiss citing the arbitration agreements. The trial court denied the motions and the Kentucky Court of Appeals agreed, allowing both suits to go forward.

The Kentucky Supreme Court consolidated the cases and affirmed the lower court decisions. The court initially examined the language of both POAs and determined that the Wellner POA did not permit Beverly to enter into an arbitration agreement. Conversely, it determined that the Clark POA was broad enough to allow Janis to enter into such an agreement. However, it held that both the agreements were invalid because it determined that a POA could not entitle a representative to enter into an arbitration agreement without specifically saying so. It explained the ruling by stating that the Kentucky Constitution protected its citizen’s rights to access its courts and trial by jury and, as such, it could be waived only if such power was specifically stated in the POA, the so-called “clear-statement rule.” The court attempted to explain its way around the FAA’s clear mandate by stating that the clear-statement rule would also apply in the future to other contracts that implicated “fundamental constitutional rights.” Three Kentucky justices filed a dissent in which they concluded that the new rule ran afoul of the FAA. The U.S. Supreme Court granted certiorari.

The Supreme Court began its analysis by reiterating its long-standing rule, recently restated in AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011) and DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015), that the FAA mandates that arbitration agreements must be on an equal plane with all other contracts and that while a court may invalidate arbitration agreements based on general contract defenses such as fraud or unconscionability, it may not do so on legal rules that apply only to arbitration agreements, even when such rules coyly avoid using the word “arbitration” and substitute phrases like “right to trial by jury” and “access to courts” like the Kentucky high court did. It determined that the clear-statement rule tried to accomplish precisely what Concepcion bars, that is, adopting a legal rule “hinging on the primary characteristic of an arbitration” – waiving the right to go to court and receiving a jury trial. To illustrate the Kentucky court’s thinly-veiled pretextual reasoning, the Supreme Court noted, for example, that nothing in the clear-statement rule prevented a representative from signing a settlement agreement or consent to a bench trial on the principal’s behalf, stating “[m]ark that as another indication that the court’s demand for specificity in powers of attorney arises from the suspect status of arbitration rather than the sacred status of jury trials.” Based on its long-standing FAA jurisprudence, the Court determined that the Kentucky court’s clear-statement rule “flouted the FAA’s command to place those agreements on an equal footing with all other contracts.”

As to the specific cases before it, the Court reversed the Clark decision since the Kentucky court had determined that that POA was broad enough to allow entry into an arbitration agreement but invalidated it based on the clear-statement rule that the Supreme Court determined violated the FAA. By contrast, the Court vacated and remanded the Wellner decision. As noted, that decision was based on the Kentucky Supreme Court’s ruling that the POA was not broad enough to allow Beverly to enter into an arbitration agreement. The Supreme Court stated if the Kentucky court’s interpretation of the agreement is “wholly independent” of the clear-statement rule, “then nothing we have said disturbs it.” However, it went on to state “[b]ut if the rule at all influenced the construction of the Wellner power of attorney, then the court must evaluate the document’s meaning anew.”

In this 7-1 decision, with Justice Thomas dissenting based on his belief that the FAA does not apply to the states, the Court left little doubt that the FAA’s mandate that arbitration agreements must be placed on equal footing with all contracts remains inviolate.

NEW YORK FEDERAL COURT ALLOWS SEXUAL ORIENTATION DISCRIMINATION CASE TO PROCEED

In Philpott v. State of New York, No. 16 CIV 6778 (AKH) (S.D.N.Y. May 3, 2017) (order granting in part and denying in part defendant’s motion to dismiss), an ongoing case in the Southern District of New York that bears following as it progresses, a federal judge ruled that the plaintiff’s claim for sexual orientation discrimination was cognizable under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e, et seq. (“Title VII”), and therefore, could proceed.

Philpott is a former Vice President of Student Affairs at SUNY’s College of Optometry who filed this case against the state of New York, the University of the State of New York and State University of New York claiming that he was discriminated against and harassed on the basis of his sexual orientation under both Title VII and Title IX of the Education Amendments of 1972, 20 U.S.C. § 1681, et seq. (“Title IX”) and chemical dependence under the Americans with Disabilities Act and that he was terminated shortly after he made those complaints. The gist of Philpott’s discrimination claim was that over a period of several years, the president of SUNY Optometry, and one of plaintiff’s co-workers 1) made a range of discriminatory comments directed at him; 2) excluded him from meetings and projects because of his sexual orientation; and 3) when he finally complained about this discrimination, his employment was terminated shortly thereafter. Defendants filed motions to dismiss and prior to the court’s decision, plaintiff dismissed all the defendants except SUNY and also dismissed his ADA claim. As such, the court needed to determine whether he had cognizable claims under Title VII and/or Title IX against SUNY and, if he did, whether he had stated a plausible claim.

As to any possible claim under Title VII, Judge Hellerstein first noted that while the Second Circuit has held that that title does not prohibit discrimination based on sexual orientation, in a March 27, 2017 decision in Christiansen v. Omnicom Grp., Inc., 852 F.3d 195 (2d Cir. 2017), the Second Circuit held that though a sexual orientation discrimination claim was not cognizable under Title VII, “a claim based on the gender stereotyping theory of sex discrimination” was. Judge Hellerstein went on to point out that in Christiansen, two of the three judges joined in a concurring opinion that he said, “persuasively outlines why sexual orientation discrimination is a form of sex discrimination and should therefore be cognizable under Title VII.” Essentially, the Christiansen concurrence stated that sexual orientation is sex discrimination because “it treats otherwise similarly-situated people differently solely because of their sex” because “sexual orientation cannot be defined or understood without reference to sex.” The concurrence went on to say that “such discrimination is inherently based on gender stereotypes.”

Judge Hellerstein then noted that on April 4, 2017, the Seventh Circuit, in an en banc decision in Hively v. Ivy Tech Cmty. Coll. of Indiana, 853 F.3d 339 (7th Cir. 2017) (en banc), became the first federal circuit court of appeals “to unequivocally hold that ‘discrimination on the basis of sexual orientation is a form of sex discrimination’ and therefore cognizable under Title VII.” The Hively court stated that it was compelled to make that determination by “the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex.” Based on the Christiansen concurrence and the Seventh Circuit’s decision in Hively, the court determined that Philpott’s allegations in the complaint had stated a claim for gender stereotyping discrimination, even though he had framed his complaint in terms of sexual orientation discrimination.

The court did, however, dismiss Philpott’s claims under Title IX because it held that the remedies available under Title IX are limited to student plaintiffs and do not extend to employment discrimination claims.

Obviously, this case bears following as it progresses, especially considering the Seventh Circuit’s decision in Hively.

FIFTH CIRCUIT’S PIERRE DEFERENCE IN ERISA CASES TRUMPS TEXAS’S ANTI-DISCRETIONARY LANGUAGE STATUTE

In Ariana M. v. Humana Health Plan of Texas, Inc., No. 16-20174, 2017 U.S. App. LEXIS 7072 (5th Cir. Apr. 21, 2017), which involved a claim for benefits under an ERISA-governed health insurance policy, the Fifth Circuit held that Texas’s statutory ban on the inclusion of discretionary clauses in such policies was not applicable to the case and, therefore, did not require de novo review of the administrator’s denial of the claim.

As ERISA administrators and practitioners know, under the Supreme Court’s ruling in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), an administrator’s coverage decision is reviewed de novo unless the plan grants the administrator discretion, in which case, it is reviewed for abuse of that discretion. Unique among the circuits however, is the Fifth Circuit’s rule, first articulated in Pierre v. Connecticut General Life Insurance Co., 932 F.2d 1552 (5th Cir. 1991), that all factual conclusions made by an ERISA administrator are reviewed for an abuse of discretion regardless of whether the plan contains discretionary language.

In Ariana M., the plaintiff had been in and out of medical facilities over several years for the treatment of mental illness, eating disorders and engaging in self-harm. Humana initially found that the treatment was medically necessary and approved a partial hospitalization for a total of 49 days but denied further treatment at the expiration of that time because it determined that the treatment was no longer necessary and plaintiff filed suit. Humana eventually filed a motion for summary judgment, and the district court, using the abuse of discretion standard in reviewing the administrator’s decision, granted Humana’s motion and plaintiff appealed.

Like many states in recent years, Texas, at Texas Insurance Code Section 1701.062(a), enacted a ban on the inclusion of discretionary language in insurance policies and most federal courts that have reviewed those statutes have held that they are not preempted by ERISA. On appeal, plaintiff argued that the Texas statute prevented the district court from using the abuse of discretion standard in reviewing Humana’s denial but the Fifth Circuit disagreed. In effect, the Fifth Circuit ruled that the statute was not applicable in this case because Pierre mandated deference to the administrator’s decision regardless of whether a policy contains discretionary language. It stated “[t]he plain text of [Section 1701.062(a)] provides only that a discretionary clause cannot be written into an insurance policy; it does not mandate a standard of review.” (emphasis added). As such, it held that the statute simply addresses the language that can be contained in a policy, not what the required standard of review in court is, and since the district court’s deferential review was required pursuant to Pierre and not the policy language, the district court’s ruling was correct.

It is worth noting however that all three members of the panel joined in a concurrence that calls into question the continued validity of Pierre and the Fifth Circuit’s lone-wolf position, ending with “[t]he lopsided split that now exists cries out for resolution.” It will be worth following to see if the Fifth Circuit addresses this issue in the near future and joins the other federal courts in requiring discretionary language in the plan documents for the application of the abuse of discretion standard.

REJECTED JOB APPLICANT’S CLAIM FOR RETALIATION UNDER FAIR HOUSING ACT CAN PROCEED

In a recent case that should give pause to employers,  the Sixth Circuit Court of Appeals, in Linkletter v. Western & Southern Financial Group, Inc., No. 16-3265, 2017 U.S. App. LEXIS 5130 (6th Cir. Mar. 23, 2017), reversed the trial court’s dismissal and allowed a plaintiff’s suit to proceed whose job offer was rescinded when the potential employer discovered that two years prior to the job offer, she had signed a petition in support of a women’s shelter, with the which the company had had a lengthy property dispute. The ruling was based on the appeals court’s determination that the company may have retaliated against the plaintiff for her support of the shelter’s residents in violation of both the federal Fair Housing Act and the Ohio Civil Rights Act.

In 2012, Gayle Linkletter signed a petition in support of the Anna Louise Inn, a women’s shelter located near Western & Southern’s offices in the Lytle Park area of Cincinnati. At that time, the company was involved in an ongoing real estate dispute with the shelter over the shelter’s location in the neighborhood and the company’s alleged attempts to force the shelter to move. The shelter eventually sued the company under the federal Fair Housing Act and the dispute ended when Western & Southern agreed to purchase the property and removed the shelter from the neighborhood.

Linkletter had worked at Western & Southern from 1997 to 2006 when the employment relationship ended amicably. In May 2014, she applied for a job at the company and, after a series of interviews, was hired. In September 2014, just prior to her beginning work, a senior vice president in the company’s legal department contacted Linkletter and told her that the company was rescinding the employment offer because it discovered she had signed the petition, which Western & Southern stated was contrary to its position. After the job offer was rescinded, Linkletter sued the company, and the employee that had rescinded the job offer, for retaliation under the Fair Housing Act, particularly 42 U.S.C. § 3617, and the Ohio Civil Rights Act.

She claimed that the rescission of her contract was in retaliation to her supporting the housing rights of the shelter’s female residents in violation of § 3617 of the Fair Housing Act. That section states, in part: “it shall be unlawful to . . . interfere with any person . . . on account of his having aided or encouraged any other person in the exercise or enjoyment of, any right granted or protected by section 3603, 3604, 3605, or 3606 of this title.” (emphasis added). Specifically, she claimed that her petition-signing “encouraged” the residents of the women’s shelter in their rights granted by § 3604, involving discrimination in the rental or sale of housing. The district court dismissed the lawsuit for failure to state a claim because it determined, among other things, that she did not “aid or encourage” the shelter’s residents as contemplated by the statute and that the housing rights under § 3604 were not at issue. It also dismissed the claims under the Ohio Civil Rights Act for essentially the same reasons because the language of the Ohio act is virtually the same as the federal one. Linkletter appealed both rulings.

The Sixth Circuit began its analysis by stating that because the statute is a remedial one, its terms should be interpreted broadly. It noted that prior rulings had held that the rescission of an employment “contract” can qualify as “interference” under the statute because it “hampers” an employment process. Even though there does not appear to be any allegation that Linkletter and Western & Southern had entered into an employment contract, the court nonetheless extended the concept to a job offer.

The court then turned its attention to the “aided or encouraged” prong of the Act. It stated that while Linkletter’s signing of the petition in itself may have seemed innocuous, taking into account the timing and the language of the petition, it was clear that it existed to encourage the women to remain in the shelter in opposition to Western & Southern’s alleged discrimination. As such, it determined that the “aided or encouraged” prong was satisfied.

Finally, the court had to analyze whether the required nexus between her actions and the rights protected by § 3604 was present. Western & Southern argued that even if it fired Linkletter for signing the petition, its motivation in the underlying lawsuit was economic, not discriminatory. While the court acknowledged that past Sixth Circuit cases required a showing of discriminatory animus for § 3617 claims, that requirement only forces the plaintiff to show “some evidence” of discriminatory effect or intent on the defendant’s part to survive summary judgment and that a plaintiff can show either direct proof of discriminatory animus or proof of disparate impact or effect. It noted that Western & Southern’s alleged actions only affected one class of people – women, and that the existence of other non-discriminatory motivations “does not protect the defendants from housing discrimination claims when their actions had a clear discriminatory effect.” Therefore, taking the allegations in the complaint in the light most favorable to Linkletter, it determined that a trial court could conclude that the company’s efforts interfered with housing rights under § 3604 and that Linkletter encouraged those same rights under § 3617 by signing the petition. As such, it reversed the trial court’s dismissal of the § 3617 claim. Because the court determined that the Ohio Civil Rights Act mirrored the language of the Fair Housing Act, it similarly reversed the lower court’s dismissal of that claim as well.

FOLLOW AN INSURANCE POLICY’S PROVISIONS ON TENDERING A DEFENSE AND INDEMNIFICATION CLAIM OR BE PREPARED TO FOOT THE LEGAL BILLS

Words in an insurance policy actually mean something and ignoring them can have real consequences for an insured. That’s the direct message the Eleventh Circuit recently sent when it decided EmbroidMe.com, Inc. v. Travelers Property Casualty Company of America, No. 14-10616, 2017 U.S. App. LEXIS 368 (11th Cir. Jan. 9, 2017). In that case, it held that a commercial general liability policyholder was not entitled to pre-tender litigation costs of more than $400,000 because it hired counsel on its own and then failed to notify Travelers of the litigation for more than 18 months.

In April 2010, EmbroidMe was sued in federal district court in Florida for copyright infringement. EmbroidMe had a commercial general liability policy through Travelers that provided both a defense and indemnification for such a claim but EmbroidMe chose not to notify Travelers of the suit or seek a defense. Instead, it retained a law firm on its own and, as noted previously, litigated the case for over 18 months, incurring fees of over $400,000. The policy contained an exclusionary provision that stated: “no insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

EmbroidMe finally tendered the matter to Travelers in October 2011. In a letter dated November 21, 2011, Travelers agreed to defend the case going forward and reserved its rights to ultimately challenge its duty to indemnify. It refused however, to reimburse the legal fees EmbroidMe had already paid, based on clear language in the policy. It also cited its right to choose counsel but it eventually agreed to retain the same firm that had been handling the case, although at a reduced rate from that paid by EmbroidMe. The plaintiff in the underlying lawsuit eventually filed a second suit after Travelers agree to take up the defense and it continued to defend both lawsuits. Ultimately, the claims made in both lawsuits were settled.

After the underlying suits were settled, EmbroidMe again tried to convince Travelers to pay the pre-tender costs, which it refused to do, and EmbroidMe filed a breach of contract action in Florida state court, which Travelers removed to federal court.

EmbroidMe contended that under Florida’s Claims Administration Statute (“CAS”), Travelers’ coverage defense was untimely because it was made 39 days after tender, nine days more than permitted under the statute. (There was some dispute about whether the reservation of rights letter was dated 39 or 42 days after tender). Among other things, the CAS estops an insurer from denying coverage unless it gives “written notice of reservation of rights to assert a coverage defense” to the insured “[w]ithin 30 days after the liability insurer knew or should have known of the coverage defense” and further requires an insurer disclaim coverage or provide its policyholder a defense within 60 days. Travelers contended that its refusal to reimburse the costs incurred without prior approval was not a coverage defense but instead was based on a policy exclusion not subject to the CAS. It filed a motion for summary judgment, citing case law from the Florida Supreme Court that had held that the CAS and its time limits applied only to coverage defenses, not policy exclusions, and the district court agreed.

Because the policy precluded the policyholder from “voluntarily assuming any obligation or incurring any expense without Travelers’ consent,” the appeals court held that Travelers’s refusal to pay for pre-tender defense costs was based on a policy exclusion, not a coverage defense and therefore the CAS’s 30-day requirement to communicate coverage did not apply. Specifically, the court stated “[a]ccording to Florida law, the assertion of a coverage defense comes within the CAS and its corresponding time limits, but a defense that a policy provision excludes coverage is not subject to the CAS’s deadlines or even to its requirement that notice be given.” It continued “because Travelers relied on an exclusion, not a coverage defense, its failure to notify EmbroidMe within the time period set out in the statute did not estop Travelers from relying on that ground in refusing to pay these unapproved expenses.”

The decision is both a cautionary tale for insureds and a reminder to insurers that courts routinely uphold clear policy exclusions.  In other words, if you want to take advantage of the policy you’re paying for, follow the provisions, especially the policy’s tender requirements.

AMPLE CREDIBLE EVIDENCE SUPPORTED DISABILITY BENEFIT TERMINATION

In Geiger v. Aetna Life Insurance Company, No. 16-2790, 2017 U.S. App. LEXIS 245 (7th Cir. Jan. 6, 2017), the Seventh Circuit Court of Appeals upheld the U.S. District Court for the Northern Illinois’s grant of summary judgment in favor of Aetna on its decision to terminate long-term disability benefits under a policy that was part of an employee welfare benefits plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). The appeals court also upheld the trial court’s denial of plaintiff’s attempt to conduct limited discovery to address an alleged conflict of interest in Aetna’s handling of the claim.

Donna Geiger worked as an account executive at Sprint Nextel from 2001 to 2009 and was a participant in the company’s employee welfare benefit plan, governed by ERISA. Aetna issued and was the claims administrator for the plan’s disability policy. In October 2009, Geiger stopped working at Sprint and claimed short term disability, which was approved by Sprint, due to lumbar back pain caused by a previous discectomy, and severe ankle pain. In January 2010, she had surgery on both ankles and eventually underwent a full ankle replacement in December 2010. During that time, Aetna determined that Geiger was disabled from her occupation as an account executive under the Plan and approved her claim for long term disability benefits.

To receive benefits during the first two years, the Plan required that Geiger be totally disabled from performing the duties of her own occupation. After two years, the Plan required that she be disabled from performing the duties of any occupation and as the two-year anniversary was approaching, Aetna began a review of the claim. The company terminated Geiger’s benefits in August 2012 after her initial 24-month period of LTD benefits expired which Geiger appealed. As part of the review, Aetna obtained peer reviews from two independent physicians, one of which concluded that Geiger’s ankle condition would not preclude her from sedentary work. It also consulted Geiger’s anesthesiologist, who agreed that Geiger was capable of sedentary work. The other independent physician reached the opposite conclusion, finding that Geiger could not perform sedentary work and on May 1, 2013, Aetna reinstated Geiger’s benefits, finding “sufficient medical evidence to support a functional impairment which precluded the employee from performing the material duties of her own occupation.”

In May 2014, Aetna again terminated Geiger’s benefits after determining that she was not totally disabled. The impetus for this termination was that Geiger had been observed on surveillance video getting into and driving an SUV, shopping at numerous locations and carrying bags during those activities, all with no apparent difficulty. Geiger again appealed, and the decision was once again upheld in February 2015, after which Geiger filed suit in the Northern District of Illinois.

Both parties moved for summary judgment and the court granted summary judgment to Aetna, holding that Aetna’s decision was not arbitrary and capricious under Section 1133 of ERISA because, among other things, Aetna had, during the process, conducted “an Independent Medical Examination, three Independent Physician Peer Reviews, a Comprehensive Clinical Assessment, a Transferrable Skills Assessment, activity report surveillance, multiple communications with Ms. Geiger’s team of physicians, and even reversed its first termination after a holistic review of Ms. Geiger’s medical history and claim application.” As such, the judge determined that the termination decision was reasonable. The court also denied plaintiff’s attempt to conduct limited discovery into Aetna’s alleged conflict of interest stating that Aetna took measures to ensure that it followed “a reasonable procedure with sufficient safeguards to prevent a detrimental conflict of interest,” including those mentioned above.

Geiger appealed claiming that the district court had erred both in granting summary judgment to Aetna and in denying discovery on the conflict issue. Geiger argued that Aetna’s termination of her benefits was arbitrary and capricious because it relied on the same evidence it had previously considered when reinstating her benefits, yet reached the opposite conclusion. The court disagreed determining that the new surveillance evidence supported one of the independent doctor’s opinions and refuted the other’s. It further noted that Aetna was entitled to seek and consider new information, change its mind in appropriate cases, and perform a periodic review of a beneficiary’s disability status. As such, it held that Aetna’s termination was not arbitrary and capricious and affirmed the district court’s decision.

The court also affirmed the lower court’s ruling denying discovery on the conflict of interest issue. It noted that a conflict of interest exists when, a plan administrator has both the discretionary authority to determine eligibility for benefits and the obligation to pay benefits when due, which was undisputed in this case. However, it also stated that discovery in a benefits case is only permitted under exceptional circumstances and that “it is thus not the existence of a conflict of interest—which is a given in almost all ERISA cases—but the gravity of the conflict, as inferred from the circumstances, that is critical.” It further noted that conflicts must be viewed considering the steps the insurer takes to minimize the potential bias and based on the district court’s finding that Aetna’s procedures were reasonable and sufficiently safeguarded against a detrimental conflict of interest and that that court has inherent broad discretion to control discovery, it determined that the district court did not abuse its discretion in denying Geiger’s request for discovery.

Broker not Liable in Fraudulent Policy Scheme because it hadn’t Placed the Policies

In M.G. Skinner & Associates Insurance Agency, Inc. v. Norman-Spencer Agency, Inc., No. 15-2290, 2017 U.S. App. LEXIS 63 (7th Cir. Jan. 4, 2017), the Seventh Circuit Court of Appeals affirmed the trial court’s ruling that Norman-Spencer Agency Inc., an insurance broker, could not be held liable for negligence or breach of fiduciary duty for its role, or lack thereof, in placing what eventually turned out to be fraudulent commercial property policies because it did not owe a duty of care to either of the plaintiffs under both an Illinois statute and common law.

Western Consolidated Premium Properties, Inc. (“WCPP”) was a risk purchasing group through which commercial property owners could buy insurance, and M.G. Skinner & Associates Inc. (“Skinner”) acted as that program’s administrator. The program involved hundreds of commercial properties, including office buildings, shopping centers and multi-unit residential properties. In 2011, WCPP sought, through its various brokers, to renew the insurance for its properties and during the renewal process, one of the brokers suggested using Norman-Spencer as a sub-broker. Ultimately however, although Norman-Spencer expressed interest in becoming involved in the process, it played no role in the actual transactions. WCPP eventually procured insurance for the majority of its properties through a Michael A. Ward and his company, JRSO LLC, and a number of WCPP properties overseen by Myan Management Group separately procured insurance with Ward and JRSO. Norman-Spencer served as program administrator of the Myan program.

In the end, the “policies” that were issued to both WCPP and Myan were a sham and were not backed by a legitimate insurer. Ward was eventually convicted of wire fraud and sentenced to 10 years in prison. He was also required to pay $9 million in restitution to various victims of the fraud, including WCPP.

Once the scam was uncovered, Myan’s coverage was reincorporated into WCPP’s, and the new insurance it was forced to buy cost over $2 million more than the sham policies.

In May 2012, WCPP and Skinner sued Ward, JRSO, Norman-Spencer and several other insurance brokers and all the claims except those against Norman-Spencer were resolved either through settlement or default judgment. As to Norman-Spencer, WCPP sought to hold it liable for negligence under the Illinois Insurance Placement Liability Act (“IIPLA”) and a common-law breach of fiduciary duty claim, because it alleged that Norman-Spencer had failed to notify WCPP of certain “obvious signs that the ultimate provider of the insurance was dishonest.” These “facts” that Norman-Spencer became aware of included orders of both conservation and confiscation issued by a Cook County, Illinois court against Ward and/or JRSO and a “suspicious” alleged reinsurance agreement that Ward had provided to Norman-Spencer after several delays. Skinner made similar claims regarding the placement of the Myan policies.

Norman-Spencer moved for summary judgment on both WCPP’s and Skinner’s claims. The district court granted Norman-Spencer’s motion for summary judgment regarding WCPP’s claims concluding that Norman-Spencer did not owe a duty to WCPP under the IIPLA because neither WCPP nor any broker in the procurement chain ever requested Norman-Spencer’s assistance with that placement. The court also granted Norman-Spencer summary judgment on WCPP’s breach of fiduciary duty claim, concluding that Norman-Spencer could not be liable under that theory because it did not participate in the placement or receive any WCPP funds from that placement.

It also granted the motion as to Skinner’s claims concluding in part that Skinner was not an “insured” on the Myan policy for purposes of the IIPLA and that because Skinner was not the “insured” on the Myan Management policy and did not make any payment toward that policy, Norman-Spencer could not have breach a fiduciary duty.

Both WCPP and Skinner appealed. On appeal, WCPP argued that three different items, an unexecuted memorandum of understanding, an undocumented conversation and an email between Norman-Spencer and another broker, evidenced that Norman-Spencer had participated as a sub-broker and could therefore be liable under the IIPLA. The appeals court rejected that argument because, among other things, there was evidence that Ward had specifically prohibited Norman-Spencer from participating in the placement. As such, Seventh Circuit agreed with the district court that Norman-Spencer owed no duty of care to WCPP because it was never involved in placing insurance on that company’s behalf and that liability under the IIPLA can only arise once an insured has made a request for specific coverage from a broker. As to the Skinner claims, while the court acknowledged that Norman-Spencer had actively procured insurance for the Myan properties, it agreed with the lower court that Skinner could not maintain its negligence claim because Skinner was not listed as an insured on the policy issued to Myan, and therefore, essentially had no standing to bring a claim under the IIPLA.

ERISA PREEMPTS DISABILITY PLAINTIFF’S CLAIM THAT AN INDEPENDENT REVIEWER WAS PRACTICING MEDICINE WITHOUT A LICENSE

In Milby v. MCMC LLC, No. 16-5483, 2016 U.S. App. LEXIS 23112 (6th Cir. Dec. 22, 2016), the Sixth Circuit Court of Appeals held that a negligence per se claim against a medical records reviewer based on a claim of practicing medicine without a license was completely preempted by ERISA.

Samantha Milby worked as a nurse at the University of Louisville Hospital and was covered by a long-term disability insurance policy through that employment. In April 2011, she applied for and received disability benefits through her insurance policy for approximately 17 months based on her claim that she could no longer work for health reasons. During the claim, the plan hired MCMC, a Massachusetts-based third-party reviewer, to review Milby’s medical records and provide an opinion on whether the medical evidence she and her doctors had provided supported her claimed work restrictions. MCMC and its agent, neither of whom were licensed to practice medicine in Kentucky, opined that Milby’s treating physicians had not provided objective findings “which would support her inability to stand and move for more than just a few minutes, as well as repetitively bend, squat, kneel, and crouch.” MCMC’s eventual opinion was that Milby would have the capacity to perform sustained full time work without restrictions as of February 23, 2013, and, based in part on that recommendation, the plan terminated Milby’s benefits effective February 21, 2013.

Milby eventually filed two separate lawsuits regarding the claim denial, one against her disability insurance provider and this one, alleging a state-law claim of negligence per se against MCMC based on her claim that it was practicing medicine in Kentucky without the appropriate licenses. MCMC removed the case to federal court based on complete preemption under ERISA. The trial court denied Milby’s motion to remand the case to state court and granted MCMC’s motion to dismiss under Fed R. Civ. P. 12(b)(6) and Milby appealed.

In its review, the appeals court had to determine whether or not the claims were preempted under ERISA, and did so by applying the test set out by the Supreme Court in Aetna Health Inc. v. Davila, 542 U.S. 200 (2004), which held that a claim falls in the category of complete preemption under ERISA section 1132(a) when it  satisfies both prongs of the following test: (1) the plaintiff complains about the denial of benefits to which she is entitled only because of the terms of an ERISA-regulated employee benefit plan; and (2) the plaintiff does not allege the violation of any legal duty (state or federal) independent of ERISA or the plan terms.

As to the first prong, the court opined that a claim “likely falls within the scope of §1132(a) when the only action complained of is a refusal to provide benefits under an ERISA plan and the only relationship between the plaintiff and defendant is based on the plan” and determined that since MCMC’s conduct was indisputably part of the process used to assess Milby’s claim for benefits, the negligence claim was actually an alternative enforcement mechanism to ERISA’s civil enforcement provisions.

As to the second prong, the court looked to Kentucky law to determine whether MCMC owed an independent legal duty to Milby separate from ERISA or the Plan’s terms. Milby argued that the medical reviewers owed her an independent duty under Ky. Rev. Stat. § 311.560, which prohibits the practice of medicine without a license. The statute defined the practice of medicine as “the diagnosis, treatment, or correction of any and all human conditions, ailments, diseases, injuries, or infirmities by any and all means, methods, devices, or instrumentalities.” Based on a previous Sixth Circuit case that had determined that simply reviewing medical files was not the practice of medicine under Kentucky law because, among other things, it did not involve making determinations regarding the medical necessity of any treatment, the court held that MCMC was not practicing medicine within the meaning of the Kentucky licensing law and therefore did not owe an independent duty to Milby under the statute she attempted to invoke. It held instead that the allegations in Milby’s complaint implicitly relied on ERISA to establish the duty required for her negligence claim, thereby satisfying the second prong of the Davila test. As such, the appellate court affirmed the district court’s dismissal because the state-law negligence claim fit in the category of claims that are completely preempted by ERISA.

SHORT-TERM DISABILITY CLAIM PROPERLY DISMISSED AS AN ERISA-EXEMPTED PAYROLL PRACTICE

In Foster v. Sedgwick Claims Management Services, Inc., 2016 U.S. App. LEXIS 21274 (D.C. Cir. Nov. 29, 2016), the District of Columbia Circuit held, among other things, that the district court’s dismissal of plaintiff’s ERISA claim regarding short-term disability benefits was proper because that benefit fell under the “payroll practice” exemption under ERISA regulations promulgated by the Department of Labor.

Kelly Foster, who was employed as a mortgage loan closer at SunTrust Bank, submitted claims for short-term disability benefits in January and August 2012 after missing work for several ailments. Sedgwick, which was the third-party administrator for both SunTrust’s short-term and long-term disability plans, denied the claims based on its determination that Foster had failed to provide “sufficient objective medical documentation” to support her claim. In September 2012, Foster was terminated based on her work absences and she subsequently appealed Sedgwick’s decision to deny short-term disability benefits, which Sedgwick upheld in early 2013. After her termination, she also filed a long-term disability claim which was also denied and upheld on appeal.

In July 2014, Foster sued both Sedgwick and the SunTrust plan under 29 U.S.C. § 1132(a), ERISA’s civil enforcement section, regarding the denial of both long-term and short-term disability benefits. Defendants filed a motion for summary judgment, claiming, among other things, that as to the short-term benefits, Foster could not seek review under ERISA because that plan was an “ERISA-exempt payroll practice,” under the DOL regulation set out at 29 C.F.R. § 2510.3-1(b)(2), which Foster conceded. Despite the concession however, the district court still analyzed defendants’ argument and independently determined that because the short-term disability benefits were “paid from SunTrust’s general assets and [were] ‘entirely separate’ from the Employee Benefits Plan,” it was a payroll plan, exempt from ERISA and since Foster’s complaint only invoked ERISA as the basis for her claims, it had no alternative but to grant summary judgment on the claim. Foster first moved for reconsideration in the district court and in that motion raised for the first time, the argument that the short-term plan was not an exempt payroll procedure and that was denied.  (The court also granted summary judgment to the defendants on the long-term claim).

The circuit court began its analysis of the short-term benefit denial by stating that without the Department of Labor’s regulation, the short-term benefit plan would be a welfare benefit plan under ERISA but that DOL exempts certain “payroll practices” from ERISA including: “[p]ayment of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.”

Analyzing the facts that were before the district court, the circuit court noted that SunTrust’s short-term disability plan clearly fit within the regulatory definition of “payroll practices” because it 1) was payment of an employee’s normal compensation; 2) paid from the employer’s general assets; and 3) was paid on account of time during which the employee was absent for medical reasons. The court went on to opine that it appeared “that SunTrust drafted its short-term disability plan to match the regulatory exemption.” As such, the appeals court affirmed the district court’s grant of summary judgment based on the payroll practices exemption on the merits, while it also rejected the appeal because the argument had not been preserved in the district court because it had not been raised prior to the motion for reconsideration. (It is worth noting that the circuit court also affirmed the denial of long-term benefits based on Sedgwick’s discretion to interpret the terms of the plan and its determination using that Sedgwick had not abused that discretion when it denied those benefits).