By: dmc-admin//January 14, 2004//
John D. Finerty, Jr. |
Employment contracts, insurance plans and employee handbooks often contain provisions that require employees to notify employers or insurance companies of potential claims and then attempt to resolve those disputes internally before proceeding to court. Employees under such an obligation, who fail to use these types of alternative dispute resolution, risk having their cases thrown out of court.
The recent case of Stark v. PPM America, Inc., et al., Case Nos. 02-3751, 02-4058, 03-4181 & 03-2655 (7th Cir. Jan. 9, 2004), is an example of how employers and insurance companies use the defense of a plaintiffs failure to exhaust contractual remedies to defeat claims.
In that case, not only did the employer prevail on the merits, but it also recovered $261,529 in defense costs.
Background
John Stark was a Vice President and Counsel to PPM America, a subsidiary of Prudential. After Prudential reorganized some of its subsidiaries and transferred Starks job duties, he received notice in 2000 that he was being fired. PPM and Stark attempted to negotiate a severance agreement that would have continued his salary for six months and paid him a lump sum severance. After discovering some alleged misconduct by Stark, PPM withdrew its severance offer. Stark then left his job claiming he was constructively terminated.
Starks ERISA Claims Dismissed
Stark sued PPM and the severance plan in federal court under the Employee Retirement Income Security Act of 1974 (PPM Holdings, Inc.s severance plan was an ERISA-covered employee benefit plan). The defendants claimed Stark failed to exhaust his contractual remedies by suing in court before filing a claim with the plan administrator and the benefits committee of the plan.
As set forth in the plan, only after exhausting those administrative remedies could a complainant file a case in federal court. In fact, the plan read as follows:
A claimant shall have no right to obtain such review or to bring an action in any court and the denial of the Claim shall become final and binding on all Persons and for all purposes.
In response, Stark claimed it was futile to file a claim because he had already unsuccessfully tried to negotiate a severance pack; in the alternative, he asked the district court judge to send the case back to the plan administrator for a determination on the merits. The court found that Starks failure to exhaust his contractual remedies was excusable, but dismissed the case because Stark could not prevail on the merits of the underlying claim.
The Seventh Circuit Court of Appeals, however, found it was an abuse of discretion under the circumstances to excuse Starks failure to exhaust his contractual remedies. The court also affirmed an award of defense costs to PPM America as the prevailing party in the case under ERISA.
The court of appeals first looked to the severance plan document for the administrative remedies requirements. It found that, under the plan, it is very clear that exhaustion is required. The court also wrote that exhaustion of plan remedies is favored because the review process may resolve some or all of the disputes, the administrators interpretation of the plan may become clarified and exhaustion would encourage private resolution of disputes generally. In Starks case, court review would have been de novo, which meant, as the court noted, Stark had nothing to lose and everything to gain by using the contractual appeal procedures. There are, however, two exceptions to this exhaustion requirement.
Exceptions to the Exhaustion Requirement
First, exhaustion may be excused if there is a lack of meaningful access to review procedures. In Starks case, this was not an issue as the plan clearly set forth the appeal procedures. The other exception applied if pursuing internal remedies would be futile. It is this second exception upon which Stark relied.
Stark claimed that the person who terminated him was also a member of the benefits committee that would have heard his appeal if the plan administrator denied his claim for severance pay. The decision-maker, however, was one of a number of committee members and there was no evidence that the committee could not have fairly considered his claim. Further, Stark also argued that the plans position in litigation, that he was not entitled to benefits, demonstrated it was predisposed against him. Addressing that argument, the court restated the following rule:
When the claimant ignores the administrative remedies and proceeds directly to federal court, he cannot be allowed to justify his choice by the fact that the plan defended itself in the lawsuit.
The court of appeals, therefore, found it was reversible error to excuse Starks failure to exhaust his contractual remedies. It also found Starks failure to file a claim with the plan administrator precluded consideration of other issues, including payment of his 2000 and 2001 bonuses. Stark, thus, lost on all counts because he did not abide by the contractual claims procedures in the severance plan.
For more information on this case or for a review of employee benefits plans, contact John D. Finerty, Jr. at Michael Best & Friedrich at (414) 225-8269 or on the Internet at [email protected].