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Whether ERISA Prohibits All Furnishing of Services in Exchange for Payment: D.D.C.

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  • Whether ERISA Prohibits All Furnishing of Services in Exchange for Payment: D.D.C.

    In a slightly unusual case out of DC, the court is faced with allegations that the Defendant essentially was engaging in transactions with interested parties.

    Plaintiffs allege that Anthem “knowingly receiv[ed] excessive compensation” during the period from 2012 through 2014. Id. ¶¶ 44-45. Specifically, they allege that the difference between the premiums Anthem received and the claims it paid ranged from $3.7 million to $7.1 million during those three years, representing “profit margins” of 26.2% to 49.8%. Id. ¶¶ 34-43. Plaintiffs also complain that, while Anthem was all too eager to seek premium increases when its profits were supposedly low, Anthem did not offer lower premiums when its profits were high. Id. ¶ 44. Plaintiffs allege that Anthem, in addition to charging unreasonable premiums, also engaged in another form of misconduct. Specifically, they allege that Anthem paid “kickbacks,” disguised as commissions, to a former UTU employee named Edward Carney from 2010 through 2013. See id. ¶¶ 61-81. During the period in question, Carney allegedly had “no business relationship with Anthem or the VSTD Plan.” Id. ¶ 61. Nonetheless, Anthem allegedly paid Carney hundreds of thousands of dollars per year from the premiums it received. Id. ¶¶ 62-65. Plaintiffs claim that Anthony Martella, who worked for a company that sold insurance to SMART members and “was in the position to steer the commission business to Carney,” helped “to orchestrate the payments from Anthem to Carney” (although how, exactly, is unclear). Id. ¶¶ 71-72. In return, Carney allegedly passed on tens of thousands of dollars from the “kickbacks” he received to Martella. Id. ¶¶ 66-70, 73. Plaintiffs also allege that, in 2011, Carney “slipped $2,000 into the coat pocket of then president of the UTU, Malcolm Futhey,” who was also a trustee of the Plan at the time. Id. ¶ 74. Plaintiffs allege that the payments from Anthem to Carney “were not reasonable commissions” and “increased, dollar for dollar, the amount of the premiums paid by VSTD.” Id. ¶¶ 77-78.
    The court explores these allegations at length, reasoning as follows:

    As the text of Section 406(a)(1) shows, Congress drew a distinction between prohibiting certain transactions with anyone, and prohibiting those transactions with a party in interest. Subsection (E) is the first kind of prohibition: it prohibits plans from acquiring employer securities (that is, securities “issued by an employer of employees covered by the plan,” 29 U.S.C. § 1107(d)(1)), under certain conditions, from anyone. Subsections (A) through (D), by contrast, are more limited. They do not categorically prohibit plans from engaging in certain types of transactions with any person or entity. They do not, for example, prohibit the “furnishing of services to the plan in exchange for compensation,” full stop. Rather, they only prohibit such transactions with “a party in interest.” If this limitation is to be given any meaning, Subsections (A) through (D) cannot be read to categorically prohibit the very transactions that cause a person to obtain the status of a party in interest. Otherwise, Subsections (A) through (D) would be just like Subsection (E): they would prohibit plans from engaging in certain forms of economic activity with anyone, regardless of that person or entity’s relationship to the plan. Therefore, Section 406(a)(1) does not admit of Plaintiffs’ interpretation, which is, as another court has observed, grounded in circular reasoning: the transactions were prohibited because Anthem was a party in interest, and Anthem was a party in interest because it engaged in the prohibited transactions. See Sacerdote v. N.Y. Univ., No. 16-cv-6284 (KBF), 2017 WL 3701482, at *13 (S.D.N.Y. Aug. 25, 2017). Rather, the statute only prohibits such service relationships with persons who are “parties in interest” by virtue of some other relationship—for example, with the employer who sponsors the plan. It does not prohibit a plan from paying an unrelated party, dealt with at arm’s length, for services rendered.
    While the rest of the opinion is nothing out of the ordinary, it is attached below. The court ultimately dismissed Plaintiff's first, second, and third counts, while allowing the remaining two to proceed.
    Attached Files
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