Attorney-Client Privilege and ERISA

By Troy A. Price

The attorney-client privilege protects confidential communications between an employer-sponsored benefit plan and its inside or outside lawyers – except when it doesn’t. Those who deal with attorneys on behalf of employer-sponsored benefit plans should be aware of the fiduciary exception to the attorney-client privilege, and what the exception means for some communications with counsel.

Fiduciary Exception Basics

There are unique rules relating to the attorney-client privilege in the context of employer-sponsored plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). This is so because ERISA is modeled on the law of trusts. Like trustees, the employer-sponsors of such plans may be fiduciaries with respect to the plans, while the employees are treated as beneficiaries. A fiduciary is one who is charged with acting in the best interests of another person, who is often known as the beneficiary. This relationship impacts the attorney-client privilege when the interests of employer-sponsor and employee-beneficiary diverge.

This exception is most important when self-funded ERISA plans are involved. In such cases, the employer typically is the plan administrator under ERISA. Plan administrators have fiduciary duties to employees. Two rationales are cited for the fiduciary exception to the attorney-client privilege: first, when an attorney provides advice regarding plan administration, the attorney’s clients are deemed to be the plan beneficiaries, not the plan administrator; second, as a fiduciary, a plan administrator has an obligation to provide full and accurate information to the plan beneficiaries regarding administration of the plan.

Some courts hold that the fiduciary exception to the attorney-client privilege applies only to communications that involve plan administration. These courts reason that when a plan fiduciary retains counsel in order to defend itself against plan beneficiaries, the privilege remains intact. Under this view, the privilege is in place when the plan administrator is no longer acting on behalf of a beneficiary, but in its own interest.

When Interests Diverge

Whether the privilege covers communications between the plan administrator and its attorney becomes most important if some benefit is denied in whole or part and the employee-beneficiary files suit. Then the plaintiff employee would likely seek to obtain all communications with counsel through some form of discovery in the litigation process. That was the case in Carr v. Anheuser-Busch Companies, a case decided by a federal trial court in the Eastern District of Missouri. The case provides context for how privilege issues might arise and the fiduciary exception might apply.

In the Carr case, a former employee sued under ERISA after the employer denied him benefits under its severance plan. During the discovery process, the former employee sought all documents relevant to the benefit denial – the “administrative record” of his claim. The employer claimed the right to withhold certain emails sent and received during the claim processing in accordance with the attorney-client privilege. The former employee argued that the emails had to be produced under the fiduciary exception to the attorney-client privilege.

The court in Carr began its analysis by pointing out that both the attorney-client privilege and the fiduciary exception to that privilege were well established. Accordingly, said the court, it was necessary to determine whether the particular communications at issue involved plan administration in a general way, or a specific attempt by the employer to defend itself against the former employee’s claims. The attorney-client privilege would protect the latter species of communications but not the former.

The Carr court observed that both the content and context of a communication must be evaluated to determine whether it concerns a matter of plan administration or legal advice for the fiduciary’s own benefit. “Frequently,” said the court, “the key question is whether the communication was made before or after the decision to deny benefits.” Courts generally reject a claim of privilege for communications made before a claim is denied.

When Privilege Applies

A more difficult question is presented by the issue of whether the privilege applies to communications made after an initial benefit determination but before an appeal to the plan administrator is completed. In Carr, after privately examining the documents, the court found that an email from the defendant’s associate general counsel to the plan administrator concerning “guidance” for handling the appeal was not protected by the privilege because it concerned plan administration. By contrast, emails from the same in-house counsel regarding the contents of the final denial letter were found to “relate to the substantive merits of plaintiff’s individual claim and the content of the final decision letter denying his severance benefits, not advice as to the procedural duties owed to each beneficiary.” This type of communication was protected by the privilege. The decision by the district court regarding privilege was later affirmed by the United States Court of Appeals for the Eighth Circuit.

It is important to note that some actions by an employer, such as decisions on whether to amend or terminate an employee benefit plan, are not considered to be fiduciary in nature. Communications with counsel regarding such decisions have been held to be protected from disclosure because the employer is plainly acting on its own behalf as sponsor of the plan, not on behalf of plan beneficiaries. For instance, in Bland v. Fiatallis North America, Inc., the United States Court of Appeals for the Seventh Circuit considered whether a company had promised lifetime health benefits to its workers in earlier versions of its plan documents. Plaintiffs were former employees who sought to explore the advice the employer received from attorneys regarding termination of benefits. The appeals court held that the fiduciary exception to the attorney-client privilege did not apply. The court explained as follows: “An employer acts in a dual capacity as both the manager of its business and as a fiduciary with respect to unaccrued welfare benefits, is free to alter or eliminate such benefits without considering employees’ interests and does not owe its employees a fiduciary duty when it amends or abolishes unaccrued benefits.” The court concluded that decisions relating to amendment or termination of a plan are not fiduciary decisions, thus the fiduciary exception to the attorney-client privilege does not apply.

On the other hand, when an insurance company has power to decide benefit claims it acts as a fiduciary under ERISA and the fiduciary exception to the attorney-client privilege applies, according to the Ninth Circuit Court of Appeals in Stephan v. Unum Life Ins. Co. In that case, the appeals court stated that there was no privilege applicable to the insurance company’s communications with its attorneys because the “duty of an ERISA fiduciary to disclose all information related to plan administration applies equally to insurance companies as to trustees.” The court noted that ERISA has broad disclosure requirements, and also requires employee benefit plans to afford a “reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the benefits.” The court also pointed out that regulations implementing the statute require that, upon request, a claimant be provided information relevant to the claim for benefits.

The Case of Self-Funded Plans

As to self-funded plans, the practical effect of the fiduciary exception to the attorney-client privilege is this: those who work with or for the plan administrator must assume that, in the event of a benefit dispute, an attempt will be made to obtain communications that otherwise would be subject to the attorney-client privilege. These communications may come from in-house counsel or outside counsel. An employee claiming benefits may contend that such communications are properly part of the administrative record of his or her claim.

In deciding whether the privilege applies, a court may examine the documents in camera (in chambers without disclosing them to the party seeking them until and unless a decision is made that the documents are subject to discovery). Some courts have said they must consider both the content of the documents and the context in which they were generated to make this decision. One factor the court may consider is whether the communication with an attorney was made before or after a benefit determination. It is more likely that the exception to the privilege will apply if the communication was made before the benefit determination.

In practical terms, it may be impossible to administer an employee benefit plan without guidance from in-house or outside counsel. The point is to be aware that there is an exception to the attorney-client privilege that applies when the employer or plan administrator is acting in a fiduciary capacity – that is, administering the plan in the most basic sense. Communications with counsel should be executed with the awareness that they may be subject to exposure to an employee-claimant. Both the attorney and the human resources professional should take note of the possibility of subsequent disclosure and govern themselves accordingly.

Troy A. Price, Partner
Labor & Employment Team
Wright Lindsey Jennings