J.J. Conway has been named a 2019 SuperLawyer by Thomson Reuters.  J.J. has been listed as SuperLawyer or SuperLawyer Rising Star on twelve prior occasions. SuperLawyers is a “rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer-recognition and professional achievement.” The selection process “includes independent research, peer nominations, and peer evaluations.” www.superlawyers.com.

For more information and to view J.J.’s Superlawyer profile, please visit: J.J. Conway’s SuperLawyer Profile.

J.J. Conway Law is an employee benefits law firm representing clients in the matters involving ERISA, pension, long-term disability insurance, healthcare, life insurance, as well as other benefit matters. Based on Royal Oak, Michigan, the firm represents clients throughout the United States in ERISA and employee benefits matters, including complex benefit class action cases.

In a sprawling trial opinion following a bench trial, the Northern District of California Federal District Court held that United Behavioral Health’s standard of care guidelines from at least 2013 through 2017 failed to comply with guaranteed terms of insurance, various laws of several states, and overall to “set forth a unified standard that is inconsistent with generally accepted standards of care.”  Wit, et al. v. United Behavioral Health, et al., No. 14-cv-02346, 2019 WL 1033730 at *33 (N.D. Cal. Mar. 5, 2019).

A class of plaintiffs asserted that UBH breached its duties by: “1) developing guidelines for making coverage determinations that are far more restrictive than those that are generally accepted even though Plaintiffs’ health insurance plans provide for coverage of treatment that is consistent with generally accepted standards of care; and 2) prioritizing cost savings over members’ interests.”

The court seized on one of UBH’s chief witness’ testimony, the individual primarily responsible for developing and maintaining the Level of Care Guidelines for over a decade, stating in part that his testimony made “it crystal clear that the primary focus of the Guideline development process… was the implementation of a ‘utilization management’ model that keeps benefit expenses down by placing a heavy emphasis on crisis stabilization and an insufficient emphasis on the effective treatment of co-occurring and chronic conditions.”  Id. at *9.

The company’s internal processing guidelines made processing claims manifestly unfair.  Here the court found “that UBH employees apply the Guidelines as written, that is, their exercise of clinical judgment is constrained by the criteria for coverage set forth in the Guidelines, which are mandatory.”  Id. at *10.

Scrutinizing UBH’s Guidelines, the court found they failed to account for the fact that “in the area of mental health and substance use disorder treatment, there is a continuum of intensity at which services are delivered.”  Id. at *16.

The court articulated seven separate “Generally Accepted Standards of Care” which framed analysis of the challenged UBH guidelines, including:

  • Effective treatment requires treatment of the individual’s underlying condition and is not limited to alleviation of the individual’s current symptoms;
  • Effective treatment requires treatment of co-occurring behavioral health disorders and/or medical conditions in a coordinated manner which considers the interactions of the disorders and conditions;
  • Patients should receive treatment for mental health and substance use disorders at the least intensive and restrictive level of care that is safe and effective;
  • When there is ambiguity as to the appropriate level of care, the practitioner should err on the side of caution by placing the patient in a higher level of care; and
  • Effective treatment of mental health and substance use disorders includes services needed to maintain functioning or prevent deterioration.

The court held that “by a preponderance of evidence… in every level of care that is at issue in this case, there is an excessive emphasis on addressing acute symptoms and stabilizing crises while ignoring the effective treatment of members’ underlying conditions.  While the particular form this focus on acuity takes varies somewhat between the versions, in each version of the Guidelines at issue in this case the defect is pervasive and results in a significantly narrower scope of coverage than is consistent with generally accepted standards of care.”  Id. at *22 (Emphasis added).


Problem Number One – An Emphasis on Requiring Improvement

Each of the Guidelines displayed an overemphasis on acuity through requiring that “in order to obtain coverage upon admission, there must be a reasonable expectation that services will improve the member’s ‘presenting problems’ within a reasonable period of time.”  Id. at *23.  The court held that the ‘presenting problems’ requirement, in combination with contemporaneous evidence, “reflects that UBH knowingly and purposefully drafted its Guidelines to limit coverage to acute signs and symptoms.”  Id. at *24.

These defects were present in “all versions of the Guidelines [which] imposed the same ‘presenting problems’ requirement, regardless of whether they used the term ‘acute’ to describe it…”  Id. at *24. Requiring improvement in ‘acute’ symptoms as a sine qua non of continuing treatment fails the standards of care test.

Problem Number Two – The “Why Now” Requirement

Similarly, the UBH Guidelines required a ‘why now’ trigger for coverage, necessitating “acute changes in the member’s signs and symptoms and/or psychosocial and environmental factors leading to admission.”  Id. at *25.

UBH witness testimony attempted to style the ‘why now’ factors as aimed to “focus people more on thinking about the whole person and everything they’re bringing to the point of request for this level of care…” Id. at *25.

The court held the ‘why now’ definition in the Guidelines themselves contradicted this testimony, specifically in that the “definition makes clear that the focus of ‘why now’ is the member’s recent severe changes and that it does not encompass factors related to the member’s chronic condition that are not directly tied to those acute changes.”  Id. Thus, the definition required a recent severe change in a condition.  Further, distinct factors within the UBH Guidelines were duplicative of the ‘why now’ testimonial explanation and evidenced a post-hoc attempt to re-craft the ‘why now’ definition.  Finally, the court also concluded that the chief witness was unconvincing, in that while he stated the ‘why now’ concept was borrowed from “crisis intervention literature,” he was unable to remember any specific sources that addressed the concept, “much less supported his explanation of its meaning.”

For 2014-2016, coverage was predicated on fulfilling the requirements that there was both no less of an intensive setting for treatment to be rendered and that the reason the patient required a higher level of care was the ‘why now’ factors.  The 2015 and 2016 guidelines also incorporated a third requirement that signs, symptoms and environmental factors require the requested intensity of services.

The court held broadly that these requirements failed the standard of care test because they were overly focused on treatment of acute symptoms.  These requirements worked to deny a member coverage, even if the other criteria were met, “if the reason the patient requires the prescribed level of care and ‘cannot’ be treated in a lower level of care is anything other than ‘acute changes in the member’s signs and symptoms and/or psychosocial and environmental factors.”  Id. at *26.  The court was clear that “neither ‘acute symptoms’ nor ‘acute changes’ should be a mandatory prerequisite for coverage of outpatient, intensive outpatient or residential treatment.” The guidelines functionally required that

just as a showing of acute symptoms is necessary for admission to a level of care, the patient must continue to suffer from those acute symptoms for coverage to continue at that level of care… The discharge criteria for the Guidelines in these years further reinforce the rule that treatment services will not be covered once the immediate crisis has passed.

Even more worrisome, “[w]here coverage at a particular level of care has been denied or terminated on the ground that the member’s acute symptoms have been alleviated, services even at a lower level of care may not be covered because of the focus on acute symptoms in the admissions criteria for all levels of care.”  Id. at *27.

Altogether, the application, flawed testimony, and reality of UBH’s Guidelines, particularly in consideration of the ‘why now’ factors, led the court to conclude that “under UBH’s Guidelines patients may be denied coverage at a higher level of care because their acute symptoms have been addressed and it is safe to move them to a lower level of care even though treatment at a lower level of care may not be effective or even covered.”  Id. at *27.

The court further held the UBH “Guiding Principles,” while emphasizing a more holistic focus on the member’s overall well-being, were essentially meaningless: “while these statements of principle are consistent with generally accepted standards of care, they are not incorporated into the specific Guidelines that establish rules for making coverage determinations.”  Id. at *28.

Additionally, the UBH Guidelines failed to take into account the challenges and unique necessity in treatment required of the combined effects of co-occurring conditions:

[D]etermination of the appropriate level of care for the purposes of making coverage decisions should be based only on whether treatment of the current condition is likely to be effective at that level of care whereas treatment of co-occurring conditions need only be sufficient to ‘safely manage’ them or to ensure that their treatment does not undermine treatment of the current condition.  Conversely, the Guidelines omit any evaluation of whether… those conditions complicate or aggravate the member’s situation such that an effective treatment plan requires a more intensive level of care than might otherwise be appropriate.

Id. at *28 (Emphasis added).  The court held that UBH’s witness testimony amounted to nothing more than “post hoc rationalizations for Guidelines that transparently fail to provide for the effective treatment of co-occurring conditions.”  Id. at 29.


Failing to Err on the Side of Caution in Favor of Higher Levels of Care

From the viewpoint that “it is a generally accepted standard of care that patients should be placed at the least restrictive level of care that is both safe and effective,” movement to a less restrictive level of care is not justified if “it is also likely to be less effective in treating the patient’s overall condition….”  Id. at *29.  Rather than embrace these principles, UBH’s Guidelines were found to, essentially, actively seek movement of patients to the least restrictive level of care.

Newly adopted annual Guidelines featured separate, additional provisions which “push[ed] patients to lower levels of care even though services at the lower level of care may not be as effective in treating the patient’s condition.”  Id. at *30.[1]  The Guidelines read to improperly direct clinicians to place an emphasis on the safety of a diminishment in level of treatment, rather than on any resultant drop in effectiveness.[2]

Defining the Purpose of Treatment

The court also determined that, beginning in 2014, UBH’s Guidelines displayed a concentrated “drive to lower levels of care, even if they were likely to be less effective in treating a patient’s overall condition,” even in how the Guidelines defined “purpose of treatment.”  Id. at *31.

While effective treatment of mental health and substance use disorders includes treatment “aimed at preventing relapse or deterioration of the patient’s condition and maintaining the patient’s level of functioning[,]” the Guidelines departed from this through requiring both marked improvement in a patient’s condition and that the improvement occur within a “reasonable time,” evidenced through a reduction or control of acute symptoms which necessitated treatment.

While UBH modeled a portion of it’s criteria to measure improvement off of the CMS Manual (a questionable decision alone), it also “modified the language used in the CMS Manual to provide for more limited coverage of services aimed at maintaining level of function.”  Id. at *31.  While the CMS Manual focused any evaluation of improvement on a comparison of “the effect of continuing treatment versus discontinuing it… UBH made important modifications in its Guidelines that focused on acuity and precluded coverage of treatment services aimed at maintenance.”  Id. at *32.  From a meta perspective, UBH shifted the focus from maintenance of perspective to crisis stabilization – thereby depriving its insureds of the right to seek treatment which managed their conditions and allowed them to live their best life in light of those conditions.


The court further found that UBH Guidelines violated generally accepted standards of care in:

  • Providing that continued stay criteria was no longer met when a member was unwilling or unable to participate in treatment;
  • Failing to adopt separate level-of-care criteria tailored to the unique needs of children and adolescents, specifically in failing to take into account stages of development and the slower pace at which children and adolescents generally respond to treatment;
  • Failing to provide for coverage at the less severe end of the American Society of Addiction Medicine spectrum; and
  • Consistent with the findings discussed above, through applying a definition of “custodial care” which generally precludes the coverage of services which are aimed at maintaining function.[3]

UBH Guidelines were also held to be out of compliance with the coverage laws of multiple states.

Capping the opinion, the court analyzed UBH’s Guideline Development process, focusing on the “why” and the executive decision-making process behind UBH’s implementation of insufficient coverage criteria.  Among other markers of financial incentives carrying an outweighed impact on the formation process behind the Guidelines, the court noted UBH’s detailed utilization data relating to average length of stay and related monthly targets, UBH’s decision in late 2016 not to amend its Guidelines with respect to Applied Behavioral Analysis, including its CEO’s statement that “[w]e need to be more mindful of the business implications of guideline change recommendations” and UBH’s decision-makers’ repeated refusal to adopt its own clinicians recommendations to integrate the ASAM criteria into its Guidelines.

While the scope of inadequacies in UBH’s coverage guidelines, spanning a period of at least five years, is staggering, perhaps even more sobering is the possibility that the flaws identified by the court are industry standard contractual cost-control mechanisms – private insured nationwide may be routinely denied adequate, necessary treatment on the basis of an overemphasis on evidencing acute improvement and an under emphasis of the treatment and maintenance of underlying conditions.

[1] E.g., the requirement that a member demonstrate “a significant likelihood of deterioration in functioning/relapse if transitioned to a less intensive level of care” for continued coverage essentially requires that coverage be discontinued unless movement to a lower level of care is unsafe, regardless of the effectiveness of treatment at a lower level of coverage.

[2] One of the noted points of agreement between the parties’ experts was that one of the year’s Guideline’s requirement that “clear and compelling” evidence be provided was an “impossible metric.”  Id. at *30.

[3] Under UBH’s Guidelines, “only those services that are expected to reduce or control acute symptoms count as ‘active treatment’ sufficient to avoid a finding that the services are custodial (and consequently excluded from coverage).”

While “ERISA and the securities laws ultimately have differing objectives pursued under entirely separate statutory schemes designed to protect different constituencies[,]” recent cases have explored the possibility of liability outside of the traditional “marketplace harm” for corporate practices which manipulated securities prices.  Jander v. Retirement Plans Committee of IBM, 910 F.3d 620, 632 (2d Cir. 2018).


Fentress v. Exxon Mobil Corporation

The recent case of Fentress v. Exxon Mobil Corporation, No. 4:16-CV-3484, 2019 WL 426147 (S.D. Tex., Feb. 4, 2019) assessed a company’s potential liability arising from its contribution to global warming.

Plaintiffs, who were participants in the Exxon Mobil Savings Plan and invested in Exxon company stock, brought a class action against Exxon senior corporate officers for failure to prudently manage the plan’s assets pursuant to 29 U.S.C. § 1104(a)(1)(D), alleging that they knew or should have known that Exxon’s stock had become artificially inflated in value owing to fraud and misrepresentation, mainly stemming from corporate failure to report impaired oil and gas reserves.  Exxon stock was the single largest holding of the plan, around $10 billion.

Materially false and misleading statements were primarily attributed to Exxon’s failure to disclose the impairment of reserves owing to, among other causes, “the proxy cost of carbon, which incorporated the future effects of global climate change….”

The plaintiffs alleged that, among other alternative actions, the defendants “should have sought out those responsible for Exxon’s disclosures under the federal securities laws and tried to persuade them to refrain from making affirmative misrepresentations regarding the value of Exxon’s reserves.”

The district court dismissed the non-public information claim because “the alternative actions proposed by plaintiffs were not ‘so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it,” as required in the Fifth Circuit.  “[C]ourts have repeatedly found that early, corrective disclosures do not meet the alternative action standard of a duty of prudence claim.”

In their amended complaint, the plaintiffs uniquely pled that “based on general economic principles… corrective disclosures do not materially affect stock prices, and that Exxon’s stock drop was instead the result of the market punishing Exxon for its fraud.”

The court acknowledged that under a stock drop theory, plaintiffs may “allege imprudence (1) on the basis of publicly available information or (2) on the basis of non-public information” however reiterated the principle that “where a stock is publicly traded, allegations that [a] fiduciary should have recognized from publicly available information alone that the market was over or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.” (quoting Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459, 2471 (2014)).  Apparently, global warming and reserve overvaluation do not qualify as “special circumstances.”

The court noted that, generally, ERISA fiduciaries can prudently rely on the market price, that the plaintiff’s burden is ‘significant’ and the alternative course of action must be “so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.”  (citing Whitley v. B.P., P.L.C., 838 F.3d 523, 529 (5th Cir. 2016)) (emphasis in the original).

The court refused to acknowledge that “attempting to prevent Exxon’s alleged misrepresentations would have been ‘so clearly beneficial that a prudent fiduciary could not conclude that it would be more likely to harm the fund than to help it.’ … As other comparable companies made corrective disclosures, remaining silent may have communicated to market investors that Exxon was facing the same troubles, which would have had much the same outcome as a corrective disclosure.”

During the pendency of briefing concluding and the court issuing a decision, Jander v. Retirement Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018) was decided. The Fentress court identified a circuit split between the Second and Fifth that deprived the Jander opinion of any precedential value, centering on “the argument that reputational damage to the company would increase the longer the fraud went on.”

Further disassociating itself from Jander, the court identified that “there was no major triggering event that made Exxon’s eventual disclosure inevitable.” Despite investigations by state attorney generals and the SEC, the court held that, while “put[ting] pressure on the company [they] resulted in no charges within the class period… Exxon’s eventual disclosure was probably foreseeable, but the Court cannot say it was inevitable.”


In re Wells Fargo 401(K) Litigation

In re Wells Fargo 401(K) Litigation, 331 F. Supp. 3d 868 (D. Minn. 2018), is another recent case to address these concepts. The plaintiffs alleged that plan fiduciaries had inside information on the basis of which “they knew or should have known that the market price for the sponsor’s stock was ‘inflated’ and that therefore the plan fiduciaries, under ERISA, were required to take some sort of action, e.g., disclosure of the inside information.”

Wells Fargo established three primary hurdles for a plaintiff bringing an ESOP claim.  First, ERISA’s duty of prudence never requires a fiduciary to break the law, thus “a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws.”  Second, when the action at issue is failure to act on negative inside information (be it via sale or disclosure), a court must carefully adjudge whether the proposed action would have ran afoul of corporate disclosure requirements or insider trading laws.  Third, and most often the heavily contested factor, a court must consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and concomitant drop in the value of the stock already held by the fund.”

Wells Fargo conceded the Supreme Court’s decision in Fifth Third Bancorp et al. v. Dudenhoeffer, 573 U.S. 409 (2016), was limited to stock drop claims based on a breach of the ERISA duty of prudence – yet securities law still complicates breach of loyalty claims under ERISA: a court “would have as much concern about these loyalty claims as it had about the prudence claims in Dudenhoeffer.”  While stock drop claims may originate under ERISA, concern of the policy implemented by the Private Securities Litigation Reform Act of 1995 which “sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers… such as heightened pleading standards” is still paramount. Plaintiff’s counsel must be wary of a complaint appearing to be nothing more than an attempt to get around those heightened pleading standards under the securities laws, involving “taking what is essentially a securities-fraud action and pleading it as an ERISA action.” (quoting Wright v. Medtronic, Inc., No. 09-cv-0443, 2010 WL 1027808 (D. Minn., Mar. 17, 2010)).

Pleading a breach of the duty of prudence requires an elevated showing – that a prudent person would not have delayed disclosure of the defect.  By comparison, pleading a breach of the duty of loyalty requires a showing that a fiduciary delayed disclosure of the defect to further his own interests, rather than the interests of the fund participants.  Tussey v. ABB, Inc., 850 F.3d 951, 958 (8th Cir. 2017) (“A fiduciary can abuse its discretion and breach its duties by acting on improper motives, even if one acting for the right reasons might have ended up in the same place.”).

Ultimately, the Wells Fargo court found that, as employees of Wells Fargo, the defendants were “incentivized to avoid doing or saying anything that would harm the image or reputation of Wells Fargo.”  The court stated, “the mere fact that a fiduciary had an adverse interest does not by itself state a claim for relief.”


Jander v. Retirement Plans Committee of IBM

In Jander v. Retirement Plans Committee of IBM, 910 F.3d 620 (2018), IBM employees claimed that the plan’s fiduciaries knew that a division of the company was overvalued but failed to disclose that fact – a failure which artificially inflated IBM’s stock price, harming the ESOP’s members.[1]  The court held that even under a more restrictive interpretation of the Supreme Court’s ruling – which was at contention between the parties – the plaintiffs plausibly alleged an ERISA violation.[2]

The plaintiffs took issue with the defendants’ continual investment of the ESOP’s funds in IBM common stock despite the plan defendants’ knowledge of undisclosed troubles relating to IBM’s microelectronics business, in violation of the duty of prudence. The plaintiffs argued the defendants should have either disclosed the truth about Microelectronics’ value or issued new investment guidelines that would temporarily freeze further investments in IBM stock.

The Jander court recognized Dudenhoeffer’s concern that “subjecting ESOP fiduciaries to a duty of prudence without the protection of a special presumption will lead to conflicts with the legal prohibition on insider trading,” given that “ESOP fiduciaries often are company insiders” subject to allegations that they “were imprudent in failing to act on inside information that they had about the value of the employer’s stock.”  That being said, the Jander court still emphasized that “an ESOP-specific rule that a fiduciary does not act imprudently in buying or holding company stock unless the company is on the brink of collapse (or the like) is an ill-fitting means of addressing” that issue, concluding that the presumption of prudence was not “an appropriate way to weed out meritless lawsuits or to provide the requisite ‘balancing.’”

The court identified the correct standard as one which must “readily divide the plausible sheep from the meritless goats,” a task that is “better accomplished through careful, context-sensitive scrutiny of a complaint’s allegations.”  The court also attacked the “presumption of prudence as ‘making it impossible for a plaintiff to state a duty-of-prudence claim, no matter how meritorious, unless the employer is in very bad economic circumstances.’”

Critically then, under the IBM court’s holding, plaintiffs must allege “an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

The IBM court identified three considerations to “inform the requisite analysis.”  The first is that the duty of prudence does not, and cannot, require an ESOP to perform an action which would violate the securities laws.  The second is that if the complaint faults fiduciaries for failing to make additional purchases or disclose information to the public, thereby avoiding overvalued stock, courts must consider whether the action advocated by the plaintiffs could conflict with insider trading and/or corporate disclosure requirements.  Finally, courts must consider whether the complaint plausibly alleged that a prudent fiduciary could not have concluded that any alternative action would have done more harm than good to the fund “by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”  Citing Fifth Third.

Noting that the plan defendants “allegedly knew that IBM stock was artificially inflated through accounting violations” and that the plaintiffs had “plausibly alleged a GAAP violation,” under ERISA’s “lower pleading standards” the plaintiffs had “plausibly pled that IBM’s Microelectronics unit was impaired and that the Plan fiduciaries were aware of its impairment.”

The court also noted that two of the plan defendants had the primary responsibility for the public disclosures that had artificially inflated the stock price to begin with and disclosure could have been done within a regular SEC reporting regime so as not to “spook the market.”

Perhaps most notably, the appellate court endorsed the allegation that the defendants’ failure to promptly disclose “hurt management’s credibility and the long-term prospects of IBM as an investment” as the eventual disclosure of prolonged fraud caused exponentially increasing “reputational damage.”  The court refused to classify this argument as retrospective – the district court’s issue with this claim – as a “reasonable business executive could plausibly foresee that the inevitable disclosure of longstanding corporate fraud would reflect badly on the company and undermine faith in its future pronouncements.”  The plaintiff also supported this argument with economic analyses.

Potentially unique to the IBM case, the court noted that the defendants “allegedly knew that disclosure of the truth… was inevitable, because IBM was likely to sell the business and would be unable to hide its overvaluation from the public at that point… In the normal case, when the prudent fiduciary asks whether disclosure would do more harm than good, the fiduciary is making a comparison only to the status quo of non-disclosure.  In this case, however, the prudent fiduciary would have to compare the benefits and costs of earlier disclosure to those of later disclosure…”  When a loss is inevitable, a fiduciary should endeavor to limit the effects of the artificial inflation, generally leaning toward earlier disclosure.

[1] In a subsequent motion to stay the Second Circuit’s mandate, the defendants’ alleged this ruling was the first to “hold that a plaintiff can state a claim for breach of the fiduciary duty of prudence under Section 502… based on the failure of a corporate officer to disclose that the company’s stock was overvalued.”  Jander v. Retirement Plans Committee of IBM, No. 17-3518, ECF No. 84.

[2] On February 4, 2019, the Second Circuit denied the defendants’ motion to stay the mandate pending the filing and disposition of their writ of certiorari.