A Recent Decision Highlights the Potentially Broad Application of the Failure-to-Exhaust Defense

A recent decision by the U.S. District Court for the Northern District of Georgia in Fleming v. Rollins, Inc., 2020 U.S. Dist. LEXIS 227697 (N.D. Ga. Nov. 23, 2020) highlights the disagreement among courts about the scope of ERISA’s requirement that participants exhaust their ERISA Section 503 administrative remedies prior to bringing suit.

ERISA Section 503 requires ERISA plans to give participants “reasonable opportunity” to submit claims for benefits to an “appropriate named fiduciary.”   Courts uniformly require participants to exhaust their plan’s administrative review process prior to filing an ERISA claim for benefits, subject to certain exceptions.  Although exhaustion is not directly specified in ERISA’s text, courts have determined that such a requirement exists and believe that it promotes the efficient review of ERISA claims.

Some courts, including the Eleventh Circuit, have gone further and required exhaustion before bringing ERISA breach of fiduciary duty claims.   In Fleming, the district court dismissed, on failure-to-exhaust grounds, an ERISA breach of fiduciary duty lawsuit alleging that the fiduciaries of a 401(k) plan mismanaged the plan’s investments.   Relying on Eleventh Circuit precedent, the court held that exhaustion was not futile simply because the plan document did not (as plaintiffs’ alleged) specifically mandate exhaustion of ERISA administrative remedies for fiduciary breach claims.  The court found that the plan’s language was broad enough to require exhaustion.

Although Fleming did not break new ground in the Eleventh Circuit, it does highlight the under-used exhaustion defense.  This defense is often used in benefit cases, but defense counsel may not appreciate that it can apply in other situations.  Even outside the Eleventh Circuit, many claims that appear to be statutory claims are really disputes over benefits and thus subject to the exhaustion requirement.  There are many advantages to this defense.   For example, the abuse-of-discretion standard of review may apply—at least to factual determinations made during the claim for benefit process.  Further, if proper procedures were followed, discovery in subsequent litigation should at least arguably be limited to the administrative record.   For all these reasons, plan sponsors and defense counsel should be aware that this defense can apply outside its traditional context.

Andrew Holly

Andrew represents clients in a wide range of complex civil matters.

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