Health Plan Sponsor Assessed Attorneys' Fees for Pursuing Meritless ERISA Claims against Plan Administrators - McDermott Will & Emery

Health Plan Sponsor Assessed Attorneys’ Fees for Pursuing Meritless ERISA Claims against Plan Administrators


The US Court of Appeals for the Eighth Circuit upheld an award of attorneys’ fees payable by a health plan sponsor to the plan administrators that the plan sponsor had sued. See Central Valley Ag Cooperative, et al. v. Leonard, et al., Nos. 19-3044 and 20-1378, Eighth Circuit (Feb. 1, 2021). The plan sponsor aggressively pursued meritless Employee Retirement Income Security Act of 1974 (ERISA) claims.

In Depth

Central Valley Ag Cooperative, an agricultural cooperative, sued several defendants that provided marketing and administrative services to Central Valley’s self-funded health plans. Beginning in 2015, a third-party administrator, The Benefits Group (TBG), would receive participants’ medical bills and forward certain bills to a reviewing company, Anasazi Medical Payment Solutions, Inc. (AMPS). AMPS would then review the bills and recommend to TBG how much of the original bill should be paid. TBG sent the recommendation to Central Valley, and Central Valley made the final decision on whether to pay the recommended amount or some other amount. Central Valley would instruct TBG to make payment on Central Valley’s behalf. As payment for its services, AMPS received 30% of the total amounts saved on bills. Of that 30%, AMPs paid 7.5% to TBG for its services in administering the plan.

In 2016, Central Valley changed to a reference-based reimbursement system, where claims were paid based on a percentage of Medicare prices for the services. The reference-based reimbursement system included a review by a “claims delegate,” which was an AMPS subsidiary referred to as CDS, with the authority to suggest different payment amounts. CDS was paid 12.5% of the gross billed charges (regardless of the savings), and of that 12.5%, CDS in turn paid 2.5% to TBG.

Central Valley alleged that AMPS and TBG were ERISA fiduciaries and the 7.5% that AMPS paid to TBG was an improper “kickback” not set forth in any contracts. Central Valley also alleged that TBG and CDS were ERISA fiduciaries; that CDS should have received only 10% of gross billed charges, not 12.5%; and that the 2.5% payment from CDS to TBG was an improper “kickback.” After discovery, the district court granted summary judgment for the defendants and ordered Central Valley to pay the defendants’ attorneys’ fees.

The Eighth Circuit affirmed. Central Valley’s ERISA claims were premised on the theory that the defendants were fiduciaries of the plans. Under ERISA, a service provider can be a fiduciary if the service provider exercises discretionary authority or control over the plan’s management, assets or administration. In the court’s words, “[d]iscretion is the benchmark for fiduciary status under ERISA.”

A service provider is not a fiduciary if its actions conform to specific contract terms or if its actions can be freely rejected by the plan sponsor. TBG was not a fiduciary because Central Valley retained control over plan assets, granting TBG only the authority to cut checks in amounts approved by Central Valley. Central Valley could “freely reject” any payment recommendation it received from TBG. Even though TBG and AMPS could increase the number of claims that were subject to review, and that could increase their compensation, Central Valley still had to approve AMPS’s recommendations and decide what portion of each medical bill was paid. Furthermore, AMPS’s payments to TBG were not “kickbacks” because the AMPS contract expressly stated that AMPS would receive 30% of claim savings, and the TBG contract allowed TBG to collect fees from firms that performed billing review.

TBG, AMPS and CDS were not fiduciaries for similar reasons. Although CDS was a fiduciary for purposes of making some claims determinations, that fiduciary duty was limited to determinations about coverage, not to determining amounts of claims.

Central Valley’s “claims lacked merit from the beginning of the lawsuit.” Despite this, Central Valley chose to pursue its “meritless litigation in an almost haphazard fashion” over the course of years, including by amending its complaint multiple times, changing legal theories and pursuing baseless ERISA claims.

McDermott Thoughts: The Central Valley decision reminds us of three important ERISA principles. First, to be a fiduciary, a party must exercise discretion over plan assets or plan management decisions. A service provider does not exercise that type of discretion when it performs services for a plan or handles plan assets pursuant to terms of an agreement or subject to the plan’s final authority. Second, fiduciary status is not all-or-nothing. Even an ERISA fiduciary will not be liable for breach of a duty that falls outside the scope of the fiduciary’s obligations. Third, ERISA contains a fee-shifting provision that permits awards of attorneys’ fees against either defendants or plaintiffs. Courts will award fees against plaintiffs if the facts support such an award.