ERISA-Sixth Circuit Rules That Suit Is Not Time Barred, And Upholds Award of Damages and Prejudgment Interest For Violation Of ERISA Fiduciary Duty

In Hi-Lex Controls, Inc. v. Blue Cross Blue Shield of Michigan, Nos. 13-1773/1859 (6th Cir. 2014), the Hi-Lex corporation (“Hi-Lex”) filed suit in 2011 alleging that Blue Cross Blue Shield of Michigan (“BCBSM”) breached its fiduciary duty under 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 awarded Hi-Lex $5,111,431 in damages and prejudgment interest in the amount of $914,241. BCBS appeals.

Hi-Lex is an automotive supply company with approximately 1,300 employees. BCBSM 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-Lexs Health and Welfare Benefit Plan (the “Health Plan”). In 1993, BCBSM implemented a new system whereby it would retain additional revenue by adding certain mark-ups (i.e., surcharges) to hospital claims paid by its clients. These fees were charged in addition to the normal administrative fee that BCBSM collected. Hi-Lex eventually brought this suit over these surcharges.

In analyzing the case, the Sixth Circuit Court of Appeals (the “Court”) ruled, first, the BCBS was an ERISA fiduciary with respect to the Health Plan, and when it imposed the surcharges, since it exercised authority or control over the plan assets. As such, imposing the surcharges is an act of self-dealing (BCBS discretionarily set fees for its own account) and violated its general fiduciary duties (loyalty, prudence and acting for participant’s exclusive benefit).

As to whether the suit is time barred, the Court said that, for actions-as here-brought under 29 U.S.C. §§ 1104(a) and 1106(b), ERISA requires that a claim be brought within three years of the date the plaintiff first obtained actual knowledge of the breach or violation forming the basis for the claim. Three years is extended to six years in the case of fraud or concealment. . Actual knowledge means knowledge of the underlying conduct giving rise to the alleged violation, rather than knowledge that the underlying conduct violates ERISA. In this case, Hi-Lex obtained knowledge of the surcharges August 2007 ( when a “Value of Blue” pie chart that depicted the charges was presented to the company as part of an annual settlement meeting with BCBSM). Since Hi-Lex filed suit in June 2011, it must avail itself of ERISA’s fraud or concealment exception or its action is time-barred. Here, BCBSM breached its fiduciary duty by committing fraud and then acting to conceal that fraud (by knowingly misrepresenting and omitting information about the surcharges) in contract documents. As such, the 6 year statute of limitations applies and Hi-Tech’s suit is not time barred. The Court affirmed the district court’s judgment, including the damages and prejudgment interest the district court had awarded

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