Compliance October 19, 2021

Judge Finds Separation Agreement Precludes ERISA Suit

A court found the terms of the agreement were broad enough to reject the plaintiff’s argument that he should be able to sue because his claims belong to, and are brought on behalf of, the plan.

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A judge has granted summary judgment to Cumulus Media in a lawsuit over retirement plan fees because he found that the plaintiff waived his right to sue.

On May 31, 2019, the plaintiff signed a separation agreement with Cumulus Media that released the company from all claims held by the plaintiff as of that date. The plaintiff admitted that before signing the agreement, he did not read the document in its entirety nor consult with an attorney about the effect of its terms.

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In February 2020, the plaintiff filed a lawsuit claiming that Cumulus Media breached its Employee Retirement Income Security Act (ERISA) duties of loyalty and prudence by offering a 401(k) plan investment menu composed of unduly expensive mutual funds and by failing to monitor or control the allegedly excessive compensation paid to the plan’s recordkeeper. The plaintiff contends that the plan and its participants suffered millions of dollars in losses because of these alleged breaches.

Judge Thomas W. Thrash Jr. of the U.S. District Court for the Northern District of Georgia noted in his opinion that the separation agreement signed by the plaintiff provides, in relevant part:

“Employee hereby irrevocably and unconditionally releases, waives, acquits and forever discharges Cumulus from any and all charges, complaints, claims, promises, agreements, damages … which employee now has, owns or holds, or claims to have, own or hold . … [T]his waiver, release and discharge includes any claim or right based upon or arising under … [ERISA] (including, but not limited to, claims for breach of fiduciary duty under ERISA) . … Employee further agrees not to bring, continue or maintain any legal proceedings of any nature whatsoever against Cumulus, before any court … by reason of or related to, any such allegations, claims, liability and/or causes of action.”

The plaintiff argued that the agreement does not preclude his claims for breach of fiduciary duty under ERISA because they belong to, and are brought on behalf of, the plan, and he is thus incapable of waiving them. He cited several cases to back up his argument, including In re Schering Plough Corp. ERISA Litig., in which the court held that “an individual release has no effect on an individual’s ability to bring a claim on behalf of an ERISA plan.”

But Thrash pointed out that the plaintiff agreed “not to bring, continue or maintain any legal proceedings of any nature whatsoever” against the defendant “by reason of or related to” the released ERISA claims. “In other words, even if the plaintiff did not actually waive the plan’s ERISA claims, he nonetheless gave up his ability to bring those claims on behalf of the plan,” Thrash explained in his opinion. With that, he concluded that the agreement forecloses the plaintiff’s action.

However, Thrash further explained that the covenant not to sue is triggered whenever the plaintiff brings a legal proceeding “by reason of or related to” the rights or claims that he released in the agreement. He said the plaintiff’s lawsuit falls under this provision because ERISA gives only “participants” (and other irrelevant individuals) the right to bring claims for breach of fiduciary duty on behalf of a retirement plan. The judge said the plaintiff forfeited this right when he waived “any claim or right based upon or arising under … [ERISA].”

Thrash added that two courts in the same district have reached the same conclusion when confronted with similar release clauses. He said the plaintiff’s cited cases do not support a different conclusion because they either did not decide the specific question at hand in the current case or did not consider a release as broad as the agreement in the current case. In In re Schering, the plaintiff waived her “right to all remedies in any … action that may be brought on my behalf,” Thrash noted.

Having admitted that he did not fully read the agreement before signing it, the plaintiff argued that Cumulus Media failed to demonstrate that he made a knowing and voluntary waiver of his ERISA claims, based on a six-factor test in the case Puentes v. UPS Inc. In addressing that argument, Thrash noted that while the plaintiff might not have taken any business or law classes in college, he presumably graduated with at least a bachelor’s degree in order to be employed as an engineer with Cumulus Media, and this is enough education to understand the terms of the agreement. He said this is especially true given the bold, capitalized summary printed above the signature block that said, “PLEASE READ AND CONSIDER THIS AGREEMENT CAREFULLY BEFORE EXECUTING. THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.”

Thrash found that the plaintiff can’t make his argument based on his failure to read it because he represented when he signed the release that he “carefully read this agreement and knows and understands its contents … and enters into the agreement knowingly and voluntarily.” In addition, the 45-day deadline to sign the agreement gave the plaintiff ample time to review and consider its terms, the judge said.

Compliance October 19, 2021

Court Addresses ERISA Coverage of Voluntary Benefit

A court found an employer ‘contributed’ to a supplemental AD&D policy by paying for basic AD&D insurance and that it ‘established’ the plan by negotiating terms with the insurer.

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An employee who sued the provider of supplemental accidental death and dismemberment (AD&D) benefits she obtained through her employer cannot have her case moved to state court because the voluntary, supplemental AD&D policy is an Employee Retirement Income Security Act (ERISA)-governed plan, a federal court has found.

Judge David J. Hale of the U.S. District Court for the Western District of Kentucky noted in his opinion in the case that the employer’s benefits guide mentions the supplemental policy alongside a “basic” AD&D policy, which the employer pays for on behalf of employees. Although employees pay for the supplemental insurance, the employer subscribes to it as a group accident policy for its employees.

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According to the opinion, both the summary plan description (SPD) and the documents the plaintiff received as a policyholder note that Life Insurance Co. of North America (LINA) issues the policy; they also list the employer as the “subscriber” and “plan administrator.” The SPD and policy documents also provide certain disclosures required under ERISA.

Hale said that to determine whether ERISA governs an employee benefit plan, his analysis must include three steps: applying the ERISA “safe harbor” regulations to determine whether the program is exempt from ERISA; determining whether a “plan” exists by inquiring whether “a reasonable person could ascertain the intended benefits, the class of beneficiaries, the source of financing and procedures for receiving benefits”; and determining whether the employer “established or maintained” the plan with the intent of providing benefits to its employees.

Hale noted that the ERISA safe harbor says an insurance policy does not qualify as an “employee welfare benefit plan” subject to ERISA if the employer makes no contribution to the policy; employee participation in the policy is completely voluntary; the employer’s sole functions are, without endorsing the policy, to permit the insurer to publicize the policy to employees, collect premiums through payroll deductions and remit them to the insurer; and the employer receives no consideration in connection with the policy other than reasonable compensation for administrative services actually rendered in connection with payroll deduction. He added that a policy is exempt under ERISA only if all four of the “safe harbor” criteria are satisfied.

Hale turned to prior case law that found in one case that an employer “contributed” when it paid for AD&D policies but not the long-term disability policy at issue. He also cited another case in which a court found an optional, employee-paid disability insurance was not severable from mandatory disability insurance paid for by the employer. Hale also pointed out that one court emphasized that subjecting employees to different state and federal regulations under the same plan would frustrate the purpose of ERISA pre-emption. Therefore, he found the employer in the present case “contributed to” the supplemental AD&D policy.

Turning to whether a benefits plan existed and whether the employer established and maintained a plan in the case of the supplemental AD&D policy, Hale said the fact that the policy is listed directly below the basic AD&D policy in the employee benefits guide indicates that the supplemental AD&D policy is part of the employee benefits package. In addition, he found that the documents provided to the plaintiff outlining the policy indicate that the “intended benefits” are supplemental AD&D benefits, and the “beneficiaries” are full-time employees. Individual employees act as the “source of financing” in paying for the policy, and the “procedures for receiving benefits” are outlined in both the SPD and the policy LINA issued to the plaintiff. Therefore, Hale found, an ERISA “plan” exists.

Finally, Hale noted that the 6th U.S. Circuit Court of Appeals has found that an employer established an ERISA plan by merely “obtaining coverage” for its employees. The plaintiff argued that LINA fails to prove that her employer established and maintained the plan because the actual owner of the policy is listed as “Trustee of the Group Insurance Trust for Employers in the Services Industry.” However, Hale pointed out that the plaintiff’s employer is listed as the “policyholder” and “subscriber” in the SPD. In addition, he said the court has previously found that listing a “Trustee of the Group Insurance Trust” as the policyholder was not sufficient to defeat a finding that an employer established and maintained a plan.

Adding that the employer negotiated the terms of the supplemental AD&D policy with LINA as part of its employee benefits plan, Hale found that the employer established and maintained an ERISA plan.

He denied the plaintiff’s motion to remand the case to state court.

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