PLAN ADMINISTRATORS MUST DISCLOSE ARBITRATION REQUIREMENT IN DENIAL NOTICES

Chappel v. Laboratory Corporation Of America, 232 F.3d 719 (9^th Cir. 2000)

Lab Corp.’s plan insured Trina's then-spouse, James Chappel by virtue of Trina's employment with Lab Corp. Lab Corp provided Trina with the summary plan description as part of her "Employment Manual."

The Employment Manual also contained a description of the Plan's claims procedure. The claims procedure required a Plan participant who wished to dispute the denial of requested benefits first to file an appeal with the Plan.  If the Plan denied the appeal, it required a dissatisfied claimant to seek arbitration as the exclusive remedy.  The arbitration provisions provided that the arbitrator’s decision will be final and binding on all parties. No party has the right to sue in any state [or] federal court with respect to any matter to which this claims procedure applies.”

Chappel submitted his medical bills.  The Plan denied benefits.  Chappel filed an appeal.  The Plan denied the appeal.  According to Chappel, the Plan did not tell him that his sole means of redress was arbitration and that he had 60 days in which to pursue it.

Chappel sued and the Plan informed him of the arbitration clause.  Chappel claimed that he had not previously known about the clause.  Chappel amended his complaint to state two claims rather than one.  The first claim requested a reversal of the denial of benefits.  It asserted that the Plan's failure to notify him of the existence of the arbitration clause when it denied his internal appeal resulted in waiver, estoppel, and detrimental reliance.  The second claim asked for a declaratory judgment that the arbitration clause violated ERISA because the clause required the beneficiary to pay one-half of the costs of the arbitration, imposed a contractual 60-day statute of limitations, and did not provide for attorneys' fees.  The district court found in favor of Lab Corp.

The Ninth Circuit said that before invoking 29 U.S.C. § 1132(a)(1)(B), an ERISA plaintiff (with a benefit claim rather than a statutory claim) must first exhaust the plan’s administrative dispute-resolution mechanisms.  If the plan contained an arbitration clause, the plaintiff must arbitrate the dispute to exhaust his administrative remedies before suing.

The court noted that the arbitration clause purported to foreclose judicial review altogether.  The court was unaware of any authority allowing an ERISA-governed plan to designate arbitration as the exclusive remedy for an aggrieved claimant and entirely to foreclose judicial review of the arbitrator's decision.  However, the case did not require it to decide whether such a term was permissible, and did not reach that question.

The Plan contained an arbitration clause and Chappel failed to exhaust this dispute-resolution mechanism.  This failure barred his suit unless he could show that the arbitration clause was unenforceable or invalid.

Chappel objected to the cost-sharing provision and to the deferential standard of review the arbitrator must apply to the Plan's benefits determinations.  The court held that these provisions did not render the arbitration clause invalid.  It noted that, without the FAA's strong policy in favor of arbitration to tip the scales, an ERISA plaintiff might more easily show that an ERISA-governed plan's arbitration clause was unenforceable because it conflicted with statutory provisions or regulations governing the judicial review of benefits determinations under ERISA.

The Plan's valid and enforceable arbitration clause barred Chappel’s claim.  However, the Ninth Circuit found that Lab Corp, as plan administrator, breached its fiduciary duty to Chappel as it adopted a mandatory arbitration clause that set a 60-day time limit in which to demand arbitration and then relied for notice of the clause and its terms, on a summary plan description contained in an employment manual.  It would have been a simple matter, when the Plan administrator sent a letter to Chappel notifying him of the denial, for the administrator to have notified Chappel in that same letter of the arbitration clause and its required procedures. If the administrator had done that, it would have fulfilled its fiduciary duty to Chappel.

In his dissent, Judge Fernandez agreed that ERISA claims are arbitrable.  He did not agree that the plan administrator breached its fiduciary duties.

He noted that the Ninth Circuit is in danger of becoming veritable Molochs for those who have the temerity to provide and administer benefit plans for America's workers. Moloch was a Canaanite god to whom children were sacrificed as burnt offerings; his name has since become a metaphor for any object to which horrible sacrifices are made.