The U.S. Court of Appeals for the Second Circuit’s holding in Kirkendall v. Halliburton, Inc. reaffirms that a benefit plan’s claims procedures must be drafted clearly and in language to be understood by a reasonable participant.  If participants are permitted to avoid a plan’s administrative claims process, there are significant impacts on a plan’s defense of a lawsuit, including application of a de novo standard of review to a benefit determination rather than the deferential arbitrary and capricious standard.

On January 29, 2013, the U.S. Court of Appeals for the Second Circuit, in Kirkendall v. Halliburton, Inc., concluded that participants are not required to exhaust administrative remedies under a pension plan’s claims procedures prior to commencing a suit under the Employee Retirement Income Security Act (ERISA) when the plan’s terms could reasonably be interpreted not to require exhaustion.

Factual Background

The named plaintiff was an employee of Dresser-Rand Company and participated in the Dresser Industries Inc. Consolidated Retirement Plan (Dresser Plan).  Dresser-Rand was a partnership formed between Dresser Industries Inc. and Ingersoll-Rand Company.  In 1998, Halliburton Inc. became a successor by merger to Dresser-Rand and assumed sponsorship of the Dresser Plan.

Halliburton sold its interest in Dresser-Rand to Ingersoll-Rand in February 2000.  Dresser-Rand continued operations as a subsidiary of Ingersoll-Rand, and its employees, including Kirkendall, believed they remained active participants in the Dresser Plan after the sale.  On December 31, 2001, the Dresser Plan was merged into the Halliburton Retirement Plan (the Plan).

The suit arose over the Dresser Plan’s administration after the sale of Dresser-Rand to Ingersoll-Rand.  Kirkendall alleged that Halliburton’s determination that her employment relationship with Halliburton terminated effective as of March 1, 2000, despite the fact she continued to work for Dresser-Rand, had the net effect of decreasing her Plan benefits.  Specifically, she claimed she lost an early retirement subsidy as a result of the sale and the determination that she had terminated employment.

During a June 2002 meeting to discuss the consequences of the sale, Dresser-Rand employees were informed that they were not eligible for an early retirement subsidy unless they had reached age 55 prior to March 1, 2000.  Following the meeting, Kirkendall made various efforts to clarify what changes had been made to the Plan and what legal avenues existed to contest her benefit computation in the event she elected early retirement.  In particular, she sent a letter to the Halliburton Benefits Center requesting copies of any Plan amendments related to the early retirement subsidy, as well as a letter, drafted by counsel, raising legal objections to Halliburton’s benefit calculations and requesting clarification of her rights for reconsideration or appeal.  Halliburton did not respond to either letter, and Kirkendall initiated a class action lawsuit challenging Halliburton’s determinations.

The district court held that the impacted participants failed to exhaust their available administrative remedies under the Plan related to challenges to their benefit calculations and dismissed the suit.  Kirkendall appealed.

The Second Circuit’s Analysis and Holding

The Second Circuit generally requires that pension plan participants exhaust their administrative remedies before commencing action in federal court.  Implied in the exhaustion requirement is the condition that the plaintiff have an administrative remedy to exhaust.  On appeal, the participant class contended that the Plan’s claims procedures do not include provisions (i.e., a remedy) related to her particular benefit challenge—a claim for clarification of future benefits.  Conversely, Halliburton argued that the Plan’s claims procedures were available to the class and that they failed to utilize those procedures, requiring dismissal of the suit.

The Second Circuit focused on the Plan’s claims procedure language, paying special attention to the repeated usage of the phrase “[a] benefit claim.”  The court drew a distinction between claims seeking retirement benefits versus inquiries seeking clarification of future benefits.  In drawing this distinction, the court found that the claims procedure was unclear whether an inquiry related to future benefit amounts constituted a “benefit claim.”  The Second Circuit then adopted precedent from the Seventh and Eleventh Circuits, whereby a plaintiff who reasonably interprets plan terms not to require exhaustion and, as a result, does not exhaust his or her administrative remedies, may proceed to directly to federal court.  To support this interpretation, the court cited the requirements that summary plan descriptions “shall be written in a manner calculated to be understood by the average participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan.”

After concluding that the Plan’s terms were ambiguous as to the class’s future benefits claim, the Second Circuit next addressed whether the interpretation that the Plan did not require the class to file benefit claims was reasonable.  The court summarized the instances where Kirkendall, on her own or through counsel, sought explanation of her Plan benefits and clarification of her rights under the Plan.  The Second Circuit concluded that it was apparent Kirkendall, as the class representative, had pursued the avenues available to her and reasonably concluded that the only means of pursuing the claim after submission of the various letters and inquiries was through a lawsuit.  Thus, due to the Plan’s ambiguity related to the claims process and Kirkendall’s  reasonable attempts to reach a final outcome, the Second Circuit concluded that exhaustion was not required in this case.

Review of Plan Terminology

The Second Circuit’s holding in Kirkendall reaffirms that a benefit plan’s claims procedures must be drafted clearly and in language to be understood by a reasonable participant.  If participants are permitted to avoid a plan’s administrative claims process, there are significant impacts on a plan’s defense of a lawsuit, including application of a de novo standard of review to a benefit determination rather than the deferential arbitrary and capricious standard.  In addition, if a claims review process is not utilized, a court is likely to allow a participant to engage in costly discovery to establish facts related to the benefit determination, rather than relying on the administrative record in reviewing a benefit decision.

To avoid these issues and preserve as many defenses to benefit claims as possible in litigation, plan sponsors should review the claims procedure language in their plan documents and summary plan descriptions to ensure the language is sufficiently broad to cover claims for current and future benefits, as well as any other benefit challenges that may arise related to benefit terms and calculations.  In addition, employers should review their plan provisions to determine if any apparent ambiguities exist.  If so, these provisions should be amended to include an expansive definition of a benefit claim in order to require exhaustion prior to instituting legal action and to preserve important defenses and litigation strategies should litigation result.