Keeping Tabs on the Ninth Circuit
August 25, 2023 - This Week at the Ninth

This Week At The Ninth: ERISA and FERC

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This week, the Ninth Circuit considers ERISA claims alleging that a plan administrator unlawfully utilized internal guidelines more stringent than the terms of plaintiffs’ plans and the statute of limitations for an action by the Federal Energy Regulatory Commission. 

The Court reverses in part the district court’s judgment following a bench trial that United Behavioral Health (“UBH”) unlawfully denied insurance claims based on internal guidelines more stringent than the terms of plaintiffs’ ERISA plans.

The panel: Judges Christen, Forrest, and Anello [S.D. Cal.], with Judge Anello writing the opinion.

Key highlight: “In sum, on this record Plaintiffs have fallen short of demonstrating that all class members were denied a full and fair review of their claims or that such a common showing is possible. An individual plaintiff who demonstrated an error in the Guidelines would not be eligible for reprocessing without at least some showing that UBH employed an errant portion of the Guidelines that related to his or her claim. Because the classes were not limited to those claimants whose claims were denied based only on the challenged provisions of the Guidelines, Rule 23 was applied in a way that enlarged or modified Plaintiffs’ substantive rights in violation of the Rules Enabling Act.” (Internal citations omitted).

Background: UBH administers insurance benefits for mental health conditions and substance abuse disorders. As the plan administrator, it must determine whether the treatment plan members seek is covered by their plans. To make that determination, UBH developed internal guidelines that applied across plans, regardless of each plan’s specific terms. For some plans, UBH is both the administrator and the insurer, meaning it both determines what benefits are owed and pays those benefits.

Plaintiffs, members of plans administered by UBH, allege that using those guidelines violated ERISA because the guidelines were more stringent than the terms of plaintiffs’ plans or criteria imposed by state law. Specifically, plaintiffs allege that certain guidelines provisions required denying treatment that is consistent with generally accepted standards of care (“GASC”). Plaintiffs brought a class action suit, alleging UBH violated ERISA by (1) breaching its fiduciary duties and (2) wrongly denying benefits. 

Plaintiffs sought certification of three classes: (1) plan members whose claims for residential treatment were denied based on guideline provisions contrary to their plans’ terms; (2) members whose claims for outpatient treatment were denied based on guideline provisions contrary to their plans’ terms; and (3) members whose claims were denied based on guideline provisions contrary to criteria required by applicable state law. 

For the fiduciary claim, plaintiffs sought injunctive and declaratory relief. For the denial of benefits claim, plaintiffs sought reprocessing of their claims. They argued that because they sought only a remand for reconsideration of their claims uninfected by use of the unlawful guidelines it was unnecessary to determine whether each plaintiff was actually entitled to benefits. The district court accepted this argument and granted certification. It explained that the class members could be identified based on UBH denial letters that referenced the challenged guidelines.

The district court entered judgment in plaintiffs’ favor following a ten-day bench trial. It concluded that UBH had a conflict of interest because it had a financial incentive to deny claims it would otherwise pay, and that it had breached its fiduciary duties and unlawfully denied benefits by applying guidelines more restrictive than the GASC and state-mandated criteria.

The Ninth Circuit affirmed in part and reversed in part. It subsequently granted a petition for panel rehearing, vacated its prior opinion, and issued a new opinion.

Result: The Ninth Circuit once again affirmed in part and reversed in part. First, it rejected UBH’s argument that plaintiffs lacked Article III standing because they did not prove that their benefits were denied. The Court explained that a statutory violation causes a concrete injury sufficient to support standing if the statute was intended to protect the plaintiff’s concrete interests and the alleged procedural violations “actually harm, or present a material risk of harm to, such interests.” Patel v. Facebook, Inc., 932 F.3d 1264, 1270-71 (9th Cir. 2019). This standard was satisfied because UBH’s use of the allegedly impermissible guidelines presented a material risk to plaintiffs’ ERISA-protected interest in having their entitlement to benefits adjudicated fairly and in accordance with their plan terms. Article III’s other requirements were satisfied because the injury was particularized and fairly traceable to UBH’s conduct.

The Court reversed in part the district court’s class certification order, finding that it violated the Rules Enabling Act. Under the Rules Enabling Act, the class action procedure cannot expand or modify substantive rights. The certification order ran afoul of this rule because it allowed all plaintiffs to obtain reprocessing of their claims, regardless of whether they were wrongly denied benefits. But under ERISA, a plaintiff is only entitled to reprocessing if their claim was wrongly denied—if the plaintiff’s claim was correctly denied on some independent basis, reprocessing is not available. The class certification order therefore enlarged plaintiffs’ substantive rights, at least as to the denial of benefits claim. The Court left the certification order intact as to the fiduciary duty claim.

This error also infected the district court’s decision on the merits, which wrongly held remand appropriate anytime UBH referenced the guidelines at all in a denial letter, rather than only when a given plaintiff’s claim was wrongly denied. The district court also erred to the extent it held that the plan terms required coverage for all medical care consistent with the GASC. UBH did not abuse its discretion by concluding that the plan terms did not require coverage for all medical care consistent with the GASC (even tempering the abuse of discretion standard, as the district court did, to take into account UBH’s financial conflict of interest). However, the district court did not err to the extent it held that the guidelines were impermissible because they denied coverage on the basis that it was inconsistent with the GASC in circumstances where that coverage actually was consistent with the GASC. UBH did not appeal the district court’s finding that the guidelines were inconsistent with state-mandated criteria, so that aspect of the decision remained intact.

Finally, the Court remanded for the district court to determine the threshold issue of whether ERISA’s exhaustion requirement applied to plaintiffs’ fiduciary claim. Since the Court had reversed class certification as to the denial of benefits claim, only the fiduciary claim remained, and fiduciary claims only require exhaustion if they are a disguised claim for benefits. The Court remanded for the district court to address that threshold question in the first instance.

The Court holds that the five-year statute of limitations for the Federal Energy Regulatory Commission (FERC) to seek a federal court order affirming a civil penalty begins to run from the date on which the penalty was assessed, not the date of the unlawful conduct resulting in the penalty.

The panel: Judges Miller, Sanchez, and Mendoza, with Judge Miller writing the opinion.

Key highlight: “FERC’s claim arises under 16 U.S.C. § 823b(d)(3)(B), which gives the agency a cause of action in federal court for ‘affirming the assessment of the civil penalty.’ A cause of action for that purpose does not exist until FERC has assessed a civil penalty. Only then does the cause of action accrue, so only then does the statute of limitations begin to run.” (citation and emphasis omitted)

Background: The Federal Power Act makes it unlawful to use “any manipulative or deceptive device or contrivance” “in connection with the purchase or sale of electric energy.” 16 U.S.C. § 824v(a). FERC can enforce this provision by initiating administrative proceedings and seeking civil penalties against a person who has violated it. If the administrative process results in a civil penalty and the defendant does not pay, FERC can bring an action in federal district court “for an order affirming the assessment of the civil penalty.” Id. § 823b(d)(3)(B). The applicable statute of limitations requires that this federal court action be “commenced within five years from the date when the claim first accrued.” 28 U.S.C. § 2462. 

Defendants Vitol, Inc. and Federico Corteggiano allegedly made unlawful manipulative trades in the California energy market on October 25 and 28, 2013. Defendants and FERC agreed to extend the statute of limitations by one year, and FERC issued an order assessing a penalty of roughly $1.5 million against Vitol and $1 million against Corteggiano on October 25, 2019. Defendants did not pay the penalty, and FERC filed an action in federal court on January 6, 2020 for an order affirming the assessment of the penalty. 

Defendants moved to dismiss the action on the ground that it was barred by the statute of limitations. They argued that the claim accrued—and the five years began to run—when the trades were made in 2013. FERC argued that the claim accrued only once FERC had assessed the penalty against the defendants in 2019. The district court agreed with FERC and denied defendants’ motion to dismiss. The court certified the question for interlocutory appeal under 28 U.S.C. § 1292(b).

Result: The Ninth Circuit affirmed. It recognized that the Supreme Court had previously instructed that accrual occurs “when the plaintiff has a complete and present cause of action, that is, when the plaintiff can file suit and obtain relief.” Wallace v Kato, 549 U.S. 384, 388 (2007) (quotation marks and citation omitted). Under 16 U.S.C. § 823b(d)(3)(B), FERC’s cause of action was for “an order affirming the assessment of the civil penalty.” The Ninth Circuit reasoned that such a cause of action could not exist until there was a civil penalty to be affirmed. The Ninth Circuit thus agreed with the district court that the five-year statute of limitations began to run only when FERC assessed the penalty in 2019. FERC’s complaint, filed in 2020, was therefore timely.

The Ninth Circuit rejected defendants’ argument that such an interpretation would allow FERC to postpone federal court action indefinitely by delaying its internal administrative proceedings and thus the assessment that would start the clock. The Ninth Circuit held that 28 U.S.C. § 2462 creates two clocks for FERC: first, it must initiate administrative proceedings by issuing a notice of proposed penalty within five years of the alleged wrongdoing; and second, it must then bring an action in federal court for an order affirming the penalty within five years of when the penalty was assessed.

The Ninth Circuit noted that the Fourth Circuit—the only other court of appeals to consider the question under § 823b(d)(3)(B)—had also interpreted the statute of limitations to run from the date the penalty was assessed. FERC v. Powhatan Energy Fund, LLC, 949 F.3d 891, 899 (4th Cir. 2020). The Ninth Circuit additionally noted that other courts of appeals had applied similar logic to different agency causes of action. See, e.g., United States v. Meyer, 808 F.2d 912, 914 (1st Cir. 1987); United States v. Godbout-Bandal, 232 F.3d 637, 640 (8th Cir. 2000); accord SEC v. Mohn, 465 F.3d 647, 654 (6th Cir. 2006); cf. United States Dep’t of Lab. V. Old Ben Coal Co., 676 F.2d 259, 261 (7th Cir. 1982). It recognized that the Fifth Circuit had taken a contrary view when interpreting the Export Administration Act in United States v. Core Laboratories, Inc., 759 F.2d 480, 482 (5th Cir. 1985), but it criticized that decision and interpreted the Fifth Circuit’s reasoning narrowly to be limited to the particular statute before it.