Colucci v. Agfa Corporation Severance Pay Plan, 431 F.3d 170 (4th Cir. 2005) – decided November 28, 2005 – United States Court of Appeals for the Fourth Circuit – Robert E. Hoskins

I represented Colucci. This case is often cited. As of March 2008, it had been cited at least 30 times in court opinions and law review articles in just a couple of years. From a legal standpoint, there is no doubt that it is an important case. What is frustrating to me about the case is that I honestly do not believe the Fourth Circuit should have ever gotten to the important legal issue for which the case is so often cited.  Colucci involved a claim for severance benefits brought pursuant to ERISA 29 U.S.C.S. § 1132(a)(1)(B). Colucci had been employed with Agfa Corporation for nearly 20 years and he participated in its severance plan. However, Colucci experienced a very short break in service with Agfa several years before his eventual separation from the company. Agfa’s severance plan was structured such that participants would be due more severance pay based upon greater “full years of service”. The issue in the case was whether “full years of service” meant all years of service such that Colucci was entitled to an amount of severance benefits based upon his nearly 20 years total service to Agfa or whether the benefits should be based upon only his most recent years of service to Agfa (i.e., after his brief break in service). Colucci argued, and the district court agreed, that the plan was unambiguous and clearly mandated that the amount of his severance benefits was dictated by his total years of service as opposed to only the most recent. As the district court held:

“A review of the Plan’s clear language reveals that Colucci is entitled to severance benefits based on both periods of employment with AGFA. When Colucci was involuntarily terminated on April 17, 2002, he became eligible for full service benefits calculated based on his “full years of service” under section 4.02 of the Plan. The Plan in section 2.12 defines “full years of service” as “the number of months of employment during the period beginning with an Employee’s Employment Commencement Date and ending on his or her Employment Severance Date, excluding any period of time not actively employed by an Employer, divided by twelve (12).” (J.S. ¶ 6.) Plainly, the Plan contemplates and addresses breaks in service for purposes of calculating severance benefits.

On May 12, 2000, Colucci voluntarily resigned, and on August 7, 2000, Colucci was rehired. Therefore, Colucci was not actively employed by AGFA for the period between May 13, 2000, and August 7, 2000. As a result, the time period Colucci was not actively employed does not count toward Colucci’s full years of service. Thus, under section 2.12, Colucci is entitled to credit for the entire time he worked for AGFA beginning January 17, 1983, and ending April 17, 2002, except for the time period between May 13, 2000, and August 7, 2000, when he was not actively employed by AGFA. Therefore, the Plan’s fiduciary abused its discretion in determining Colucci’s “full years of service” under the Plan for purposes of calculating severance benefits.

The plan argues that because Colucci voluntarily resigned, he was ineligible for severance benefits for his first period of employment with AGFA. Further, the Plan argues that when Colucci was rehired, his retire date became his employment commencement date for purposes of determining his severance benefits. However, the Plan ignores the fact that the employment commencement date is “the first day on which an Employee is covered by an Employer.” (J.S. ¶ 6.) (emphasis added). The first day that Colucci was employed with AGFA was January 17, 1983. Further, as pointed out by Colucci, no language in the Plan provides that the employment commencement date becomes the rehire date if an employee returns to work for AGFA after voluntarily leaving. Therefore, under the plain and unambiguous language of the Plan, Colucci is entitled to severance benefits based on both periods of employment with AGFA.” (Click here to view the entire district court opinion)

The Defendant appealed to the United States Court of Appeals for the Fourth Circuit. On appeal, the parties rehashed their arguments from the district court. However, the Fourth Circuit seized upon an argument that, in my opinion, had never been raised by the Defendant at any prior level and which had never been addressed by the parties or the lower court. The Fourth Circuit relied upon a part of the plan document that the court even made a point to state was not applicable to Colucci’s situation to hold that the relevant portion of the plan document was ambiguous. In so doing, the court stated:

“While the district court found “first day” to be unambiguous, it unduly limited the scope of its inquiry and failed to recognize that, in the context of the entire Plan, “first day” is a term of art that begins a discretion period of time defined by the Plan as “Full Years of Service.” A fuller reading of the Plan discloses that the Plan itself recognizes that a single employee can have multiple blocks of “Full Years of Service,” each with a different “Employment Commencement Date,” and consequently the employee can have multiple “first days”. Section 4.08(b) of the Plan states:

In the event the Severed Employee’s employment is terminated in a manner which causes the Severed Employee to receive a severance benefit under this Plan within two (2) years of the date he or she is reemployed or reinstated with an Employer, the Severed Employee will receive a severance benefit under Section 4.01 of the Plan, with his or her number of Full Years of Service computed by adding his or her Full Years of Service prior to reemployment or reinstatement to his or her Full Years of Service after reemployment or reinstatement and subtracting the number of weeks already paid to the Severed Employee attributable to his or her termination of employment prior to reemployment or reinstatement . . . .

Because Colucci’s voluntary departure from Agfa disqualified him from receiving severance benefits for his “Full Years of Service” prior to his departure, § 408(b) does not apply to Colucci’s specific situation. Yet, the emphasized portion of this section crucially recognizes that a single “Employment Commencement Date” is not logically required by the Plan’s definition of “Full Years of Service”. If Colucci’s interpretation were correct, § 408(b) would have been written more straightforwardly. It would not have commanded the administrator to add one “Full Year of Service” (with its own “first day”) to a second “Full Years of Service” (also with its own “first day”), and then to subtract already-paid severance. Instead, it would have commanded the administrator to begin with the one and only “Full Years of Service,” tracing the period back to the first ever employment date and subtracting out from that larger figure the time already paid and the time not actively employed.

It is apparent from the Plan’s definition and use of “Full Years of Service” that a “first day,” which defines the period called “Full Years of Service,” can recur throughout an employee’s employ with the company. The ambiguity thus created for finding the relevant “first day” of employment is not unlike the ambiguity that a high school senior would face if asked to name his first day of school. He could give as his answer either the first day of his senior year, or the first day of high school, or the first day or kindergarten at another location. Any such response would reasonably identify his first day of school.

In like fashion, we conclude that “Employment Commencement Date” and “first day,” as used in the Severance Plan, are ambiguous terms in that they can reasonably refer to different dates. Accordingly, they are susceptible to the administrator’s interpretative discretion.” (Emphasis added)

It is because of the aforementioned holding that I was so disappointed with the Fourth Circuits’s decision in Colucci. I have certainly lost my share of cases in my career and although I am always disappointed for my client, I usually find that I understand the decision and, on some level, usually agree. However, the Colucci decision bothers me greatly because I strongly disagree with the method by which the Fourth Circuit found that the policy was ambiguous. In any event, the court did find that the policy was ambiguous and the rest is history, as they say. The court proceeded to hold that with a self-funded benefit plan that is administered by the same company who also sponsors and funds the plan that the court will not automatically factor in an inherent conflict of interest in evaluating the reasonableness of that plan’s claim decisions. The Fourth Circuit has always held that with insured plans the court is content to automatically factor in a conflict of interest factor to lessen the deference afforded an insurer’s claim decision. However, the court reasoned that the same principles are not applicable with a self-funded plan. As the Fourth Circuit stated in Colucci,

“We have indeed recognized that “[a] fiduciary’s conflict of interest . . . may operate to reduce the deference given to a discretionary decision of that fiduciary. . . . [A] court, presented with a fiduciary’s conflict of interest, may lessen the deference given to the fiduciary’s discretionary decision to the extent necessary to ‘neutralize any untoward influence resulting from that conflict.’” Booth, 201 F.3d at 343 n.2 (quoting Doe v. Group Hospitalization & Med. Servs., 3 F.3d 80, 87 (4th Cir. 1993)).

But the simple and commonplace fact that a plan’s administrator is also its funder is not enough to support a finding of a conflict of interest that would cause an adjustment to our deference. See De Nobel, 885 F.2d at 1191. The circumstances under which we have suggested a conflict of interest might arise are when a plan is managed by its insurer, whose revenue comes from fixed premiums paid by the plan’s sponsor. In such a case, we were willing to assume that the insurer-administrator’s profit motives unavoidably factored into its decisions to accept or deny plan members’ claims:

To the extent that Blue Cross has discretion to avoid paying claims, it thereby promotes the potential for its own profit. That type of conflict flows inherently from the nature of the relationship entered into by the parties and is common where employers contract with insurance companies to provide and administer health care benefits to employees through group insurance contracts.

Doe, 3 F.3d at 86.

There is a material difference, however, between a corporation whose business profits primarily derive from managing ERISA plans and a corporation that collaterally manages a plan through which it chooses to provide its employees with benefits. We question how a company that creates, funds, and administers a plan for its own employees’ benefit can, from those facts alone, be presumed to have a financial conflict in administering that plan when the company remains free to end the plan altogether. The company’s business plan could not be dependent on its denying benefits, as might have been the case in Doe, because it could decide to deny all benefits simply by ending the plan should the benefits become too burdensome. When a company sponsors a plan and then administers it, the fact that the benefits cost money is insufficient to support the presumption of a conflict; that cost is the product of its election to provide the employees with benefits. Colucci has neither alleged nor demonstrated how Agfa’s administration of its Plan was driven by any interest other than its will to apply the terms under which it elected to provide benefits to its employees.”

After the decision, I felt that the conflict of interest issue was important and unsettled nationally. The circuit courts are clearly split on the issue of exactly when to recognize a conflict of interest and how that conflict should factor into the evaluation of the reasonableness of a plan’s ERISA claim decision. In fact, Colucci is directly at odds with the Sixth Circuit’s opinion in Killian v. Healthsource Provident Administrators, Inc.. 152 F.3d 514 (6th Cir. 1998). (Click here to see this website’s discussion of Killian.) Therefore, I prepared and filed a petition for writ of certiorari with the Supreme Court. (Click here to see the petition) The petition was denied. However, on June 19, 2008, the United States Supreme Court issued its decision in Glenn.  The court effectively overruled Colucci and held:

“The first question asks whether the fact that a plan administrator both evaluates claims for benefits and pays benefits claims creates the kind of “conflict of interest” to which Firestone’s fourth principle refers.  In our view, it does.

That answer is clear where it is the employer that both funds the plan and evaluates the claims.  In such a circumstances, “every dollar provided in benefits is a dollar spent by . . . the employer; and every dollar saved . . . is a dollar in [the employer’s] pocket.”  Bruch v. Firestone Tire & Rubber Co., 828 F.2d 134, 144 (CA3 1987).  The employer’s fiduciary interest may counsel in favor of granting a borderline claim while its immediate financial interest counsels to the contrary.  Thus, the employer has an “interest . . . conflicting with that of the beneficiaries,” the type of conflict that judges must take into account when they review the discretionary acts of a trustee of a common-law trust.  Restatement § 187, Comment d; see also Firestone, supra, at 115 (citing that Restatement comment); cf. Black’s Law Dictionary 319 (8th ed. 2004) (“conflict of interest” is a “real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties”).”

In fact, both Chief Justice Roberts and Justice Scalia specifically discussed Colucci in their respective dissents.  Although Glenn clearly put an end to the terrible precedent that was Colucci, that result came too late for Mr. Colucci.