Hi-Lex Controls, Inc. v. Blue Cross Blue Shield Michigan

• Decision Date: 14 May 2014
• Docket Number: 13–1859.,Nos. 13–1773,s. 13–1773
• Citation: 751 F.3d 740
• Parties: HI–LEX CONTROLS, INC., Hi–Lex America, Inc., and Hi–Lex Corporation Health and Welfare Benefit Plan, Plaintiffs–Appellees/Cross–Appellants, v. BLUE CROSS BLUE SHIELD OF MICHIGAN, Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

751 F.3d 740

HI–LEX CONTROLS, INC., Hi–Lex America, Inc., and Hi–Lex Corporation Health and Welfare Benefit Plan, Plaintiffs–Appellees/Cross–Appellants,

v.BLUE CROSS BLUE SHIELD OF MICHIGAN, Defendant–Appellant/Cross–Appellee.

Nos. 13–1773, 13–1859.

United States Court of Appeals, Sixth Circuit.

Argued: March 19, 2014.

Decided and Filed: May 14, 2014.

ARGUED: Robin Springberg Parry, United States Department of Labor, Washington, D.C., for Amicus Curiae. James J. Walsh, Bodman PLC, Ann Arbor, Michigan, for Appellant/Cross–Appellee. Perrin Rynders, Varnum, Grand Rapids, Michigan, for Appellees/Cross–Appellants. ON BRIEF:James J. Walsh, G. Christopher, Bernard, Rebecca D'Arcy O'Reilly, Bodman PLC, Ann Arbor, Michigan, for Appellant/Cross–Appellee. Perrin Rynders, Aaron M. Phelps, Stephen F. MacGuidwin, Varnum, Grand Rapids, Michigan, for Appellees/Cross–Appellants. Robin Springberg Parry, United States Department of Labor, Washington, D.C., Ronald S. Lederman, Gerard J. Andree, Sullivan, Ward, Asher & Patton, P.C., Southfield, Michigan, for Amici Curiae.

Before: KEITH, SILER, and ROGERS, Circuit Judges.

OPINION

SILER, Circuit Judge.

The Hi–Lex corporation, on behalf of itself and the Hi–Lex Health & Welfare Plan, filed suit in 2011 alleging that Blue Cross Blue Shield of Michigan (BCBSM) breached its fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA) by inflating hospital claims with hidden surcharges in order to retain additional administrative compensation. The district court granted summary judgment to Hi–Lex on the issue of whether BCBSM functioned as an ERISA fiduciary and whether BCBSM's actions amounted to self-dealing. A bench trial followed in which the district court found that Hi–Lex's claims were not time-barred and that BCBSM had violated ERISA's general fiduciary obligations under 29 U.S.C. § 1104(a). The district court also awarded pre- and post-judgment interest. We AFFIRM.

I.

Hi–Lex is an automotive supply company with approximately 1,300 employees. BCBSM is non-profit entity regulated by the state of Michigan that contracts to serve as a third-party administrator (TPA) for companies and organizations that self-fund their health benefit plans.

Since 1991, BCBSM has been the contracted TPA for Hi–Lex's Health and Welfare Benefit Plan (Health Plan). The terms under which BCBSM served as the Health Plan's TPA are set forth in two Administrative Services Contracts (ASCs) the parties entered into in 1991 and 2002, respectively. The parties renewed those terms each year from 1991 to 2011 by executing a “Schedule A” document.

Under the ASCs, BCBSM agreed to process healthcare claims for Hi–Lex's employees and grant those employees access to BCBSM's provider networks. In exchange for its services, BCBSM received compensation in the form of an “administrative fee”—an amount set forth in the Schedule A on a per employee, per month basis.

In 1993, BCBSM implemented a new system whereby it would retain additional revenue by adding certain mark-ups to hospital claims paid by its ASC clients. These fees were charged in addition to the “administrative fee” that BCBSM collected from Hi–Lex under a separate portion of the ASC. Thus, regardless of the amount BCBSM was required to pay a hospital for a given service, it reported a higher amount that was then paid by the self-insured client. The difference between the amount billed to the client and the amount paid to the hospital was retained by BCBSM. This new system was termed “Retention Reallocation.”

The fees involved in this new system have been termed “Disputed Fees” by the district court. They include:

A. Charges for access to the Blue Cross participating provider and hospital network (Provider Network Fee);

B. Contribution to the Blue Cross contingency reserve (contingency/risk fee);

C. Other Than Group subsidy (OTG fee); and

D. a retiree surcharge.

Hi–Lex asserts that it was unaware of the existence of the Disputed Fees until 2011, when BCBSM disclosed to the company in a letter the existence of the fees and described them as “administrative compensation.”

Following the disclosure, Hi–Lex sued BCBSM, alleging violations of ERISA as well as various state law claims. The district court dismissed the company's state law claims as preempted, but granted Hi–Lex summary judgment on its claim that BCBSM functioned as an ERISA fiduciary and that BCBSM had violated ERISA by self-dealing. Furthermore, after a nine-day bench trial, the district court ruled that BCBSM had violated its general fiduciary duty under § 1104(a) and that Hi–Lex's claims were not time-barred. The court awarded Hi–Lex $5,111,431 in damages and prejudgment interest in the amount of $914,241.

BCBSM asserts that the district court erred by (1) finding the company was an ERISA fiduciary, (2) ruling that BCBSM had breached its fiduciary duty under ERISA § 1104(a), (3) holding that BCBSM had conducted “self-dealing” in violation of ERISA § 1106(b)(1), and concluding that Hi–Lex's claims were not time-barred. Hi–Lex cross-appealed, arguing that the district court abused its discretion by orderingan insufficient prejudgment interest award.

II.

We review a district court's summary judgment rulings de novo. Pipefitters Local 636 Ins. Fund v. Blue Cross & Blue Shield of Mich., 722 F.3d 861, 865 (6th Cir.2013)( Pipefitters IV ). The same standard applies when this court reviews “a district court's determination regarding ERISA-fiduciary status.” McLemore v. Regions Bank, 682 F.3d 414, 422 (6th Cir.2012). After a bench trial, a court's legal conclusions are reviewed de novo while its factual findings are reviewed for clear error. James v. Pirelli Armstrong Tire Corp., 305 F.3d 439, 448 (6th Cir.2002).

III.

A. BCBSM's ERISA Fiduciary Status

A threshold issue in this case is whether BCBSM functioned as an ERISA fiduciary for Hi–Lex's Health Plan. In relevant part, ERISA provides that

a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, ... or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.

29 U.S.C. § 1002(21)(A) (emphasis added). The term person is defined broadly to include a corporation such as BCBSM. Id. § 1002(9). In Briscoe v. Fine, we found this statute “impose[d] fiduciary duties not only on those entities that exercise discretionary control over the disposition of plan assets, but also impose[d] such duties on entities or companies that exercise ‘ any authority or control’ over the covered assets.” 444 F.3d 478, 490–91 (6th Cir.2006). Applying that standard, we recently held that BCBSM functioned as an ERISA fiduciary when it served as a TPA for a separate client under the same ASC terms at issue here. See Pipefitters IV, 722 F.3d at 865–67. In that case, we found that BCBSM functioned as an ERISA fiduciary with respect to hidden OTG fees that it unilaterally added to hospital claims subsequently paid by the Pipefitters Fund. Id. at 866–67.

BCBSM argues that the decisions in McLemore, 682 F.3d at 422–24, and Seaway Food Town, Inc. v. Med. Mut. of Ohio, 347 F.3d 610, 616–19 (6th Cir.2003), support its right to collect fees per the terms of its contract with Hi–Lex. In Seaway, however, we qualified our holding by noting that while simple adherence to a contract's term giving a party “the unilateral right to retain funds as compensation” does not give rise to fiduciary status, a “term [that] authorizes [a] party to exercise discretion with respect to that right” does. 347 F.3d at 619. Acknowledging this, BCBSM argues that it exercised no discretion with respect to the Disputed Fees because they were part of the standard pricing arrangement for the company's entire ASC line of business. The record, though, supports a finding that the imposition of the Disputed Fees was not universal. The district court cited an email in which BCBSM's underwriting manager, Cindy Garofali, acknowledged that individual underwriters for BCBSM had the “flexibility to determine” how and when access fees were charged to self-funded ASC clients. Moreover, Garofali admitted during testimony at trial that the Disputed Fees were sometimes waived entirely for certain self-funded customers. See also Pipefitters Local 636 Ins. Fund v. Blue Cross & Blue Shield of Mich., 213 Fed.Appx. 473, 475 (6th Cir.2007)(Pipefitters I) (noting that self-insured clients were not always required to pay the Disputed Fees). The district court did not err in finding that the Disputed Fees were discretionarily imposed.¹

BCBSM also attempts to distinguish this case from Pipefitters IV by arguing that the funds which paid the Disputed Fees were Hi–Lex's corporate assets, not “plan assets” subject to ERISA protections. In Pipefitters IV, corporate funds from several employers were first pooled together in a trust account, the Pipefitters Fund, which then remitted funds to BCBSM in its capacity as a TPA. In this case, the funds Hi–Lex sent to BCBSM in its role as TPA came not from a formal trust account, but from a combination of the company's general funds and Hi–Lex employee contributions.

Department of Labor regulations state that employee contributions constitute plan assets under ERISA once they are “segregated from the employer's general assets.” 29 C.F.R. § 2510.3–102(a)(1). Thus, the health care contributions deducted from Hi–Lex employees' paychecks and sent to BCBSM to pay claims and administrative costs qualify as plan assets.²See U.S. Dep't of Labor, Advisory Op. No. 92–24A, 1992 WL 337539, *2 (Nov. 6, 1992) (AO 92–24A) (“all amounts that a participant pays to or has withheld by an employer for purposes of obtaining benefits under a plan will constitute plan assets”); see also United States v. Grizzle, 933 F.2d 943, 946–47 (11th Cir.1991) (fi...