In Stephens v. Pension Benefit Guaranty Corporation, No. 13-5129 (D.C. Cir. 2014), the Court faced the following situation. When a group of U.S. Airways pilots hung up their wings over a decade ago, they expected prompt payment of their retirement benefits. When payment was delayed 45 days, the group filed a class action on behalf of themselves and similarly situated pilots seeking interest for the period of delay. But did the class members have to exhaust internal plan remedies before filing suit under ERISA? The Court ruled that the class members were not required to exhaust internal remedies, because they seek enforcement of ERISA’s substantive guarantees rather than contractual rights.
In so ruling, the Court said that, although ERISA itself does not require a plan beneficiary to exhaust internal plan remedies before bringing suit, courts have universally applied the requirement as a matter of judicial discretion. However, despite the universal acceptance of the general exhaustion rule, the courts of appeal are split on the question of whether beneficiaries of an ERISA plan must exhaust internal plan remedies before suing plan fiduciaries on the basis of an alleged violation of duties imposed by the statute, an issue now facing the D.C. Circuit for the first time.
The Court noted that the Third, Fourth, Fifth, Ninth, and Tenth Circuits have held exhaustion is not required when plaintiffs seek to enforce statutory ERISA rights rather than contractual rights created by the terms of a benefit plan. The Seventh and Eleventh Circuits, on the other hand, have held the exhaustion requirement applies even where plaintiffs assert statutory rights. The Court said that it agreed with the courts of appeal ruling that exhaustion is not required. A balancing of interests compels the Court to require claimants to exhaust internal remedies when they assert rights granted by a benefit plan. But it logically suggests direct resort to the federal courts where claimants assert statutory rights–a practice that better promotes Congress’s intent to create minimum terms and conditions for pension plans. And in this case, the Court said, the proposed class was asserting statutory rights, since the class relied on a right granted them by ERISA’s regulations–the right to receive a lump sum payment without unreasonable delay. In other words, the class asserts a statutory claim because the district court on remand will have to evaluate the plan’s administration under a reasonableness standard created and defined by federal law.