Cutting v. Jerome Foods, Inc.

• Decision Date: 20 May 1993
• Docket Number: No. 92-1405,92-1405
• Citation: 993 F.2d 1293
• Parties: 16 Employee Benefits Cas. 2492 Diane M. CUTTING and Warren L. Cutting, Plaintiffs-Appellants, v. JEROME FOODS, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1293

993 F.2d 1293

16 Employee Benefits Cas. 2492

Diane M. CUTTING and Warren L. Cutting, Plaintiffs-Appellants, v. JEROME FOODS, INCORPORATED, Defendant-Appellee.

No. 92-1405.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 6, 1992.

Decided May 20, 1993.

Arnold P. Anderson (argued), Mohr, Anderson & McClurg, Hartford, WI, for plaintiffs-appellants.

Howard R. Flaxman (argued), Nina A. Riasanovsky, Blank, Rome, Comisky & McCauley, Philadelphia, PA, Bradley C. Lundeen, Gilbert, Mudge, Porter & Lundeen, Hudson, WI, for defendant-appellee.

Before POSNER and FLAUM, Circuit Judges, and WILLIAMS, District Judge. ^*

POSNER, Circuit Judge.

Diane Cutting was seriously injured in an automobile accident. She has incurred $90,000 in medical expenses alone, and expects to incur additional medical expenses in the future. An uninsured-motorist policy paid her $126,000 and she recovered another half million dollars on a products-liability claim, but as she reckons her total damages from the accident at $1 million there is a considerable shortfall. Her husband's employer, Jerome Foods, Inc., has an unfunded, company-administered employee benefits plan that covers spouses. The Cuttings submitted Mrs Cutting's medical expenses to the plan for payment. The plan was willing to pay--provided the Cuttings agreed to reimburse it for any amounts that they had received from other sources. The basis of this demand was the subrogation clause of the benefits plan, which provides that by accepting any payment of plan benefits the covered employee or dependent "agrees that the Plan shall be subrogated to all claims, demands, actions and rights of recovery of the individual against any third party or any insurer, including Workers' Compensation, to the extent of any and all payments made or to be made hereunder by the Plan." The Cuttings refused to reimburse the plan, contending that a right of subrogation does not arise unless the covered individual has been made whole, in which case the payment of benefits under the plan would confer a windfall. If it is assumed that Diane Cutting really did sustain a loss of $1 million of which more than $900,000 is for items of loss or expense other than medical expenses, then since she has recovered less than $650,000 the effect of subrogation would be to reduce her recovery of nonmedical expenses by the exact amount of the plan payments, so that she would derive no benefit in fact from the plan. Although there would be a sense in which her medical expenses had been fully paid (by the product manufacturer and the uninsured-motorist insurer), it would be a misleading sense. The "payment" would be out of money that would otherwise have been hers to apply to other items of loss caused by the accident that gave rise to the medical expenses.

The company rejected the Cuttings' interpretation of the subrogation clause, precipitating this declaratory judgment action by the Cuttings. Having removed the suit to federal court because the plan is governed by the Employee Retirement Income and Security Act (ERISA), 29 U.S.C. §§ 1001 et seq., Jerome Foods moved successfully for summary judgment. 820 F.Supp. 1146 (W.D.Wis.1992).

The plan provides that "all decisions concerning the interpretation or application of this Plan shall be vested in the sole discretion of the Plan Administrator," that is, Jerome Foods. Read literally, this terminology would extinguish all judicial review of refusals by Jerome Foods to pay benefits. The company concedes, however, that it should not be read literally--that it is not a license to make arbitrary or capricious decisions on applications for benefits. Cf. Lister v. Stark, 942 F.2d 1183, 1188 (7th Cir.1991). Were it otherwise, the coverage provided by the plan would be, not illusory exactly but noncontractual, because the company could turn down an application for benefits on whim. It might sometimes be tempted to do so. The plan is unfunded, with the result that every penny paid out in plan benefits comes out of the company's coffers; and even with funded or insured welfare plans, the employer has a financial stake in limiting the payment of benefits.

Of course, a company that is capricious in its bestowal of benefits may have to pay higher wages to compensate its workers for the anticipated reduction in the certainty and value of their benefits, or it may incur the potentially costly ill will of the workers. Some workers might prefer to rely on their employer's long-term self-interest in playing fair with benefits than to insist on a costly regime of legal rights for which they pay indirectly in lower wages or more limited benefits, just as many workers appear to prefer jobs in which they are employees at will to tenured positions as civil servants. We are not certain that there is any legal impediment to a plan's forbidding judicial review of the plan administrator's decisions. ERISA provides that "a civil action may be brought by a participant or beneficiary ... to recover benefits due," 29 U.S.C. § 1132(a)(1)(B), but if the plan entrusts the determination of what is due to the unreviewable discretion of the plan administrator, it can be argued that no benefits will be due unless the administrator awards them. And although the Supreme Court held in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S.Ct. 948, 956, 103 L.Ed.2d 80 (1989), that the default standard of judicial review of a plan administrator's decision is de novo review, it also held that if the plan gives the administrator discretion to construe its provisions the court will defer. Id. at 111, 115, 109 S.Ct. at 954, 956; Lister v. Stark, supra, 942 F.2d at 1187-88. Not defer completely, however--defer in the sense conveyed by such familiar and possibly synonymous terms as "abuse of discretion" and "arbitrary and capricious" (between which the Court found it unnecessary to choose), for which clear error may be a further synonym. Id. at 1188; Haugh v. Jones & Laughlin Steel Corp., 949 F.2d 914, 916-17 (7th Cir.1991). It is one thing to interpret a provision that vests discretion in a plan administrator as commanding judicial deference within reason, another thing to interpret it as commanding complete deference. The indications that the latter was intended would have to be pretty conclusive to persuade us, and we agree with the parties that the reference to "sole discretion" is not (quite) conclusive evidence of such an intention and therefore should not be interpreted to strip the plan's beneficiaries of all legal remedies, especially given the conflict of interest inherent in an unfunded employer-administered plan. (Compare the hostility of trust law to efforts by a trustee to place himself beyond liability for profiting from a breach of trust. Restatement (Second) of Trusts § 222(2) (1959).) Otherwise the employees would have no contractual protection.

It is true, as we have pointed out, that employees often bargain away contractual protection. That is of the essence of the regime of employment at will, which is still the dominant regime for employment in this country. But this is only to say that employees normally will not pay for job insurance beyond what arrangements for unemployment compensation and severance pay provide them. They will pay for medical insurance and they usually want more assurance of insurance than an unenforceable promise from their employer would give them. Although an employer's concern for employee relations and good will will inhibit him from indulging in wholly irrational self-serving interpretations, it is not a complete guarantee. A rational employer will trade off the cost of such an interpretation against the gain in reduced expense, which might be critical, especially for employers in a financially parlous state. A good business reputation is not a very valuable asset to a firm that has little confidence of being able to remain in business long enough to profit from that reputation. Long-run self-interest is a weak constraint on firms that have poor long-run prospects.

So the Cuttings are entitled to judicial review of the company's ruling. But they are wrong to argue that the standard of judicial review is de novo--that we should give no weight to the company's interpretation. That as we said is the default standard. If the plan itself vests discretion in the administrator--if as here it gives the administrator a long leash--the courts pull back and defer broadly although not totally to the administration's determination, upending it only if persuaded that the administrator acted unreasonably. Firestone Tire & Rubber Co. v. Bruch, supra, 489 U.S. at 115, 109 S.Ct. at 956.

The interpretive question is sufficiently close in this case that a deferential standard of review dictates affirmance of the plan's decision, and hence of the district court's decision. We may put to one side Jerome Foods' argument that all that the Cuttings are contending is that we should apply Wisconsin subrogation law to this case. Wisconsin is indeed a state that recognizes the "make whole" qualification to a subrogee's rights; but the Cuttings concede as they must that ERISA preempts state law dealing with the interpretation of an ERISA plan, unless, as is not the case here, the plan involves the purchase of an insurance policy as the method of providing plan benefits. See FMC Corp. v. Holliday, 498 U.S. 52, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990), holding a state subrogation rule preempted; Provident Life & Accident Ins. Co. v. Linthicum, 930 F.2d 14 (8th Cir.1991) (per curiam) (ditto). The Cuttings do not ask us to apply state law. They ask us to adopt a federal common law rule to the effect that rights of subrogation are enforceable only after the plan beneficiary has been made whole for the loss giving rise to the claim for benefits. That the federal rule might coincide with the law of Wisconsin is of no moment--especially since the Cuttings argue that the...