In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3865
JEFFREY L. SMITH,
Plaintiff-Appellant,
v.
M EDICAL B ENEFIT
A DMINISTRATORS G ROUP, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 09 C 538—Rudolph T. Randa, Judge.
A RGUED S EPTEMBER 7, 2010—D ECIDED M ARCH 15, 2011
Before F LAUM, R OVNER, and SYKES, Circuit Judges.
R OVNER, Circuit Judge. On behalf of himself and others
similarly situated, Jeffrey L. Smith sued Medical Benefits
Administrators Group, Inc. (doing business as “Auxiant”),
the claims administrator for his workplace health
insurance plan, contending that Auxiant breached its
fiduciary obligations to Smith when it preauthorized
his gastric bypass surgery and then turned around and
2 No. 09-3865
denied his claim for benefits after the surgery took place
on the ground that it was excluded from coverage
under the terms of Smith’s health insurance plan. Smith
sought both monetary and injunctive relief pursuant to
the Employee Retirement Income Security Act of 1974,
29 U.S.C. §§ 1001, et seq. (“ERISA”). The district court
dismissed his complaint pursuant to Federal Rule
of Civil Procedure 12(b)(6), reasoning that Smith was
primarily interested in an award of monetary relief that
ERISA does not authorize for a breach of fiduciary duty,
and that although equitable relief is available for such
an injury under the statute, the type of injunctive relief
that Smith sought amounted to a form of extracontractual
relief that ERISA likewise does not permit. Smith v. Med.
Benefit Adm’rs Grp., Inc., 665 F. Supp. 2d 989 (E.D. Wis.
2009). We affirm in part and reverse in part. Although
we agree with the district court that legal relief is unavail-
able to Smith, he may have a viable claim for equitable
relief. This assumes, as we note in closing, that Smith’s
complaint has accurately characterized Auxiant’s pre-
authorization decisions and has not omitted any dis-
claimers that Auxiant may have issued to participants
as to the nature of these decisions.
The following facts are derived from Smith’s complaint,
and we accept them as true for purposes of deciding
whether the complaint states a claim on which relief
may be granted. E.g., Jay E. Hayden Found. v. First Neighbor
Bank, N.A., 610 F.3d 382, 384 (7th Cir. 2010). Smith works in
Fond du Lac, Wisconsin, for Brenner Tanks, which spon-
sors a group health plan for its employees. Auxiant serves
as the third-party claims administrator for that plan
No. 09-3865 3
(among others), in which capacity it grants or denies
claims for benefits under the health plan. The terms of
that plan obligated Smith to notify Auxiant and obtain
preauthorization for certain medical services, including
any (non-emergency) surgery. On May 19, 2006, Smith
and his physicians notified Auxiant that Smith had been
advised to undergo gastric bypass surgery in order to
ameliorate his congestive heart failure and other medical
complaints. About four months later, on September 11,
2006, Auxiant preauthorized the surgery, and Smith
underwent the surgery on October 5, 2006. On Novem-
ber 27, 2006, Auxiant denied payment of the claims re-
sulting from Smith’s surgery and hospitalization, citing
an exclusion in the health plan for surgery and other
medical services related to obesity. Smith exhausted
his internal appellate remedies with Auxiant without
success. Smith’s medical providers then sought payment
directly from Smith.
What happened to Smith is not unique, according to
the complaint. He alleges that Auxiant routinely drags
its feet in responding to preauthorization requests,
leaving plan participants in limbo as to whether the
surgical procedures and other treatments their physi-
cians have recommended will be authorized, and in
some cases forcing participants to undergo treatment
without knowing whether Auxiant will authorize it.
Second, and more centrally, he alleges that Auxiant
routinely preauthorizes medical treatment after a
cursory review that does not consider whether the pro-
posed services or the underlying condition they are
intended to treat are covered by the terms of the
4 No. 09-3865
health plan. Only after the insured has received the
preauthorized treatment and Auxiant receives claims
from the insured’s medical providers does Auxiant con-
sider whether the medical services in question are, in
fact, covered. Consequently, Auxiant may, as in Smith’s
case, deny coverage for treatment that it preauthorized.
The insured is then left on the hook for the costs of treat-
ment that he might have elected to forego had he
realized that it would not be covered by insurance.
Smith’s complaint characterizes Auxiant’s delayed
preauthorization decisions, and its practice of pre-
authorizing treatment without considering whether the
treatment is covered by the insurance policy, as breaches
of the fiduciary obligations that Auxiant owes to Smith
and his fellow plan participants. Smith seeks “an appro-
priate award of damages, restitution, and/or other mone-
tary relief” (R. 1 at 12) to compensate him for the finan-
cial injury he suffered in undergoing a surgery that
Auxiant later determined was not covered by his health
plan, along with injunctive and declaratory relief. His
complaint seeks similar relief on behalf of other insureds
who have likewise obtained preauthorization for med-
ical treatment that Auxiant determined to be excluded
from coverage after the fact.
The district court dismissed the complaint, concluding
that the relief Smith seeks is not authorized by the
relevant provisions of ERISA. Smith could not obtain
relief under section 502(a)(1) of the statute, which autho-
rizes a claim for benefits due under a plan, 29 U.S.C.
§ 1132(a)(1)(B), because as Smith conceded, his health
No. 09-3865 5
insurance plan does not actually cover gastric bypass
surgery. 665 F. Supp. 2d at 991. Nor could he obtain
relief under section 502(a)(2), the provision that Smith
cited in his complaint. 29 U.S.C. § 113(a)(2). That provi-
sion authorizes a plan participant, among others, to
seek “appropriate relief” under section 409(a) of the
statute, which in turn renders a fiduciary “personally
liable to make good to [a] plan any losses to the plan,”
resulting from a breach of the fiduciary’s obligations.
29 U.S.C. § 1109(a). Smith was seeking compensation
for the loss to his own pocketbook rather than to the
plan, and as he conceded that his insurance plan did not
entitle him to coverage for his surgery, he was seeking
the very sort of extracontractual relief that the Supreme
Court had said was not authorized by section 502(a)(2).
665 F. Supp. 2d at 992-93 (applying Massachusetts Mut.
Life Ins. Co. v. Russell, 473 U.S. 134, 148, 105 S. Ct. 3085,
3093 (1985)). Extracontractual relief in the form of com-
pensatory damages was likewise unavailable to Smith
under section 502(a)(3)(B), which authorizes only “appro-
priate equitable relief” for practices that contravene the
statute or the terms of the plan. 29 U.S.C. § 1132(a)(3)(B).
Injunctive relief and other forms of equitable relief were
authorized, but to the extent Smith sought such relief,
he was, in the court’s view, seeking to modify rather
than to vindicate the terms of his health insurance plan.
665 F. Supp. 2d at 994. For example, Smith proposed an
injunction that would forbid Auxiant from denying
benefits to a plan participant for preauthorized treat-
ment on any ground that Auxiant had not identified
during its pre-service review. “In effect, Smith would
6 No. 09-3865
have the Court enter an order varying the terms of the
plan documents in the event that Auxiant pre-approved
a procedure or failed to follow the relevant pre-autho-
rization regulations. This is a convoluted form of extra-
contractual relief, but it is extracontractual nonethe-
less. Even if Smith was harmed by his reliance on
Auxiant’s pre-authorization, he still received the proper
amount due under the plan—nothing.” Id.
Although Smith filed this suit as a class action, the
district court dismissed his complaint without reaching
the subject of class certification. Therefore, for purposes
of our review, we shall treat the case as if it were filed
on Smith’s behalf alone. Shlahtichman v. 1-800 Contacts,
Inc., 615 F.3d 794, 797-98 (7th Cir. 2010), cert. denied, 131
S. Ct. 1007 (2011). Our review of the dismissal is, of
course, de novo. Id. at 798. Smith is required by Federal
Rule of Civil Procedure 8(a)(2) to set forth in his com-
plaint “a short and plain statement of the claim showing
that [he] is entitled to relief.” He need not plead a detailed
set of facts, so long as the complaint supplies Auxiant with
“fair notice of what . . . the claim is and the grounds upon
which it rests.” Erickson v. Pardus, 551 U.S. 89, 93, 127 S. Ct.
2197, 2200 (2007) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555, 127 S. Ct. 1955, 1964 (2007)); Swanson v.
Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010). His claim
must be “plausible on its face,” Twombly, 550 U.S. at 570,
127 S. Ct. at 1974; Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949
(2009), which requires the court to consider whether the
events alleged could have happened, not whether they
did happen or likely happened, Swanson, 614 F.3d at 404.
See also In re Text Messaging Antitrust Litigation, 630 F.3d
No. 09-3865 7
622, 629 (7th Cir. 2010) (“the complaint must establish
a nonnegligible probability that the claim is valid; but
the probability need not be as great as such terms as
‘preponderance of the evidence’ connote”).
Smith’s complaint plausibly alleges that Auxiant
breached its fiduciary obligations to him. As a claims
administrator with the power to grant or deny a partici-
pant’s claim for health insurance benefits, Auxiant is
an ERISA fiduciary. 29 U.S.C. § 1002(21)(A)(i) and (iii);
e.g., Mondry v. Am. Family Mut. Ins. Co., 557 F.3d 781, 803
(7th Cir.), cert. denied, 130 S. Ct. 200 (2009). As such,
Auxiant is obliged to carry out its duties solely in the
interest of the insurance plan’s participants and bene-
ficiaries and with the exclusive purpose of providing
them with benefits, while employing “the care, skill,
prudence, and diligence” of a knowledgeable and
prudent individual acting in the same capacity. 29
U.S.C. § 1104(a)(1)(A)(i) and (B); see Kenseth v. Dean
Health Plan, Inc., 610 F.3d 452, 465-66 (7th Cir. 2010).
Auxiant “thus owes the participants in [the] plan and
their beneficiaries a duty of loyalty like that borne by
a trustee under common law, § 1104(a)(1)(A), and it
must exercise reasonable care in executing that duty,
§ 1104(a)(1)(B).” Id. at 466 (citing Mondry, 557 F.3d at 807).
This duty of loyalty encompasses a negative obligation
not to mislead the insured, as well as a positive obligation
to communicate material information to the insured
in circumstances where the fiduciary’s silence might
itself lead the insured to misapprehend his rights and
obligations. Id.
8 No. 09-3865
Accepting the allegations of Smith’s complaint as true,
one can see how Auxiant’s preauthorization practices
might constitute a breach of this duty. By preauthorizing
a medical treatment without first ascertaining whether
that treatment is covered by the insurance plan, and
indeed without warning the insured that coverage
might be denied notwithstanding the preauthorization,
Auxiant could be thought to be misleading the insured
to his detriment. We reached a similar conclusion in
Kenseth, where the insurer encouraged plan participants
with questions about whether a particular medical
service would be covered to telephone a customer
service representative, who would in turn answer those
questions without warning the caller that the advice
was not binding and that the insurer might reach a dif-
ferent conclusion after the caller underwent treatment.
610 F.3d at 466-81. Delays in preauthorization might
also be seen as inconsistent with Auxiant’s obligation to
the insured. To the extent such delays exceed the period
of time allowed by federal regulations, as Smith has
alleged,1 they could be deemed unreasonable and in
that sense a breach of the duty of care that Auxiant owed
to Smith and the other participants in the group health
plan. See Mondry, 557 F.3d at 807-08 (specific statutory
1
See 29 C.F.R. § 2560.503-1(f)(2)(iii)(A) (“In the case of a pre-
service claim, the plan administrator shall notify the claimant
of the plan’s benefit determination (whether adverse or not)
within a reasonable period of time appropriate to the medical
circumstances, but not later than 15 days after receipt of the
claim by the plan. . . .”).
No. 09-3865 9
mandates can inform scope of fiduciary’s duty to in-
sured). And to the extent a delay in preauthorization
might foreseeably harm the insured by forcing him to
postpone the treatment his physician has recommended,
it could be understood as a breach of the duty of loyalty
to the insured. The complaint thus articulates a viable
theory of liability. The more difficult question is
whether Smith may obtain meaningful relief on that
theory.
Section 502 of ERISA identifies who is entitled to bring
a civil action to enforce the prescriptions of the statute
and what relief may be obtained. The district court cor-
rectly identified the three provisions of this section
that are potentially relevant here. Section 502(a)(1)(B)
permits a plan participant or beneficiary to, inter alia,
“recover benefits due to him under the plan [or] to
enforce his rights under the terms of the plan . . . .”
§ 1132(a)(1)(B). But Smith concedes that the terms of the
plan exclude his gastric bypass surgery from coverage.
Thus, as the district court correctly reasoned, whatever
Auxiant may have led Smith to believe when it
preauthorized his surgery, he cannot obtain relief for a
denial of benefits pursuant to section 502(a)(1), as there
are no benefits owed to him under the terms of the plan.
Section 502(a)(2) of the statute permits a plan
participant to seek “appropriate relief” pursuant to
section 409, which in turn deems a fiduciary personally
liable for, inter alia, “any losses to the plan” resulting
from a breach of the fiduciary’s obligations, along with
“such other equitable or remedial relief as the court may
10 No. 09-3865
deem appropriate.” §§ 1109, 1132(a)(2). However, when
he seeks relief under section 502(a)(2), a plan participant
acts as a representative of the plan, and any relief
he obtains “inures to the benefit of the plan as a whole.”
Massachusetts Mut. Life Ins. Co. v. Russell, supra, 473 U.S.
at 140, 105 S. Ct. at 3089. This is not the type of relief
that Smith seeks; his complaint is plainly aimed at ob-
taining relief for injuries that he, rather than his plan,
suffered as a result of Auxiant’s alleged actions. See, e.g.,
Wise v. Verizon Commc’ns, Inc., 600 F.3d 1180, 1189 (9th
Cir. 2010) (affirming dismissal of request for relief
under section 502(a)(2) for allegedly improper denial of
disability benefits, where complaint did not allege that
insurance plan as whole suffered any injury as conse-
quence of alleged mishandling of claim); see also Varity
Corp. v. Howe, 516 U.S. 489, 515, 116 S. Ct. 1065, 1079 (1996)
(section 502(a)(2) “does not provide a remedy for indi-
vidual beneficiaries”) (citing Russell).
In this respect, Smith finds himself in the same posi-
tion as the respondent in Russell, who sought compensa-
tion for the financial and psychological injuries she suf-
fered when her disability benefits were interrupted for
five months. Russell alleged that plan officials had
breached their fiduciary obligations in cutting off her
benefits when they ignored the medical evidence of her
continuing disability, applied criteria that were too
strict, and intentionally took more time to act on her
request for an internal review than permitted by reg-
ulations. But once Russell had prevailed in that review,
she had been granted retroactive benefits and thus
had ultimately been granted everything to which her
No. 09-3865 11
insurance plan entitled her. The additional relief that she
sought in the way of damages was extracontractual,
and the Court concluded that the statute provided no
authority for an award of such relief to a beneficiary. 473
U.S. at 144, 148, 105 S. Ct. at 3091, 3093.
The Court’s more recent decision in LaRue v. DeWolff,
Boberg & Assocs., 552 U.S. 248, 128 S. Ct. 1020 (2008), is of
no help to Smith vis-à-vis the scope of section 502(a)(2).
LaRue simply holds that in the context of a defined con-
tribution pension plan, in which there are individual
accounts holding assets for each participant, malfeasance
by a plan fiduciary that adversely affects the value of the
assets held in such an account will support a suit under
sections 409 and 502(a)(2) regardless of whether the
wrongdoing affects one account or all accounts in the
plan. “Whether a fiduciary breach diminishes plan assets
payable to all participants and beneficiaries, or only
to persons tied to particular individual accounts, it
creates the kind of harms that concerned the draftsmen of
§ 409.” Id. at 256, 128 S. Ct. at 1025. The plan at issue
here, however, is a group health insurance plan, which
is the kind of defined benefit plan that the Court dealt
with in Russell (and distinguished in LaRue), and which
typically holds no assets in trust for any individual par-
ticipant. It is Russell rather than LaRue that controls
here, and as Smith has identified no injury to the plan,
he has no viable claim for relief under section 502(a)(2),
as the district court concluded. 665 F. Supp. 2d at 992-93.
That leaves section 502(a)(3), which authorizes a plan
participant, among others, to file suit “(A) to enjoin any
12 No. 09-3865
act or practice which violates any provision of this
subchapter or the terms of the plan, or (B) to obtain
other appropriate equitable relief (i) to redress such
violations or (ii) to enforce any provisions of this
subchapter or the terms of the plan[.]” § 1132(a)(3). It is
this provision of ERISA that permits a participant to
obtain relief for a breach of fiduciary duty on behalf of
himself as opposed to the plan. Steinman v. Hicks, 352
F.3d 1101, 1102 (7th Cir. 2003) (coll. cases).2 The difficulty
Smith faces, however, is that section 502(a)(3) permits
only injunctive and “other appropriate equitable relief.”
Legal remedies are thus foreclosed to Smith for Auxiant’s
alleged breach of fiduciary duty. Mertens v. Hewitt Assocs.,
508 U.S. 248, 113 S. Ct. 2063 (1993). Consequently,
although he may have relied to his detriment on
Auxiant’s preauthorization of his surgery, and now must
pay for that surgery himself, he cannot be compensated
monetarily for that injury, as that is a classic form
of legal relief. Kenseth, 610 F.3d at 483. Restitution, it
is true, may in appropriate circumstances be deemed
equitable rather than legal relief, as when a fiduciary
is wrongfully holding money that belongs to plaintiff.
Kenseth, 610 F.3d at 482; cf. Mondry, 557 F.3d at 806-07 (self-
funded insurance plan, by delaying reimbursement to
2
The fact that Smith cited section 502(a)(2) alone and not
section 502(a)(3) in his complaint is not fatal to his complaint,
as the federal rules do not require him to plead legal theories
in his complaint. E.g., Hatmaker v. Memorial Med. Ctr., 619
F.3d 741, 743 (7th Cir. 2010), cert. denied, 2011 WL 767573
(U.S. Mar. 7, 2011) (No. 10-724).
No. 09-3865 13
plaintiff for covered services, arguably benefitted from
delay while depriving plaintiff the time value of her
money; restitution therefore equitable in sense it would
serve to disgorge plan of ill-gotten gain). But that is not the
case here. Smith concedes that the plan excludes
coverage for his surgery and does not otherwise allege
that Auxiant is wrongfully withholding money that
belongs to him. See Kenseth, 610 F.3d at 482.
Still, section 502(a)(3) does authorize an award of de-
claratory and injunctive relief. The complaint’s prayer
for relief sought both types of relief, R. 1 at 12-13, and
in his memorandum opposing Auxiant’s motion to
dismiss, Smith reiterated that he indeed intended to
pursue these types of relief, R. 8 at 22-23, 24. The
district court acknowledged as much, but concluded
that the injunctive relief Smith was seeking was but
another form of extracontractual relief that ERISA did
not authorize. In particular, Smith suggested that it
might be appropriate for the court to enjoin Auxiant
from invoking coverage exclusions or other defenses
when it has preauthorized medical services without
noting such exclusions or defenses or when it has failed
to comply with the regulations governing insurance
claims handling. R. 8 at 22. The district court construed
this as a request for extracontractual relief to the extent
that such an injunction would effectively modify the
terms of the plan. 665 F. Supp. 2d at 994. It may well
be right. But even if ERISA would not permit that par-
ticular form of injunctive relief, there are other forms
of meaningful declaratory and injunctive relief that
might be wholly consistent with ERISA. To cite an ob-
vious example (one that Smith himself noted below), the
14 No. 09-3865
court could declare that Auxiant’s method of handling
requests for preauthorization either do not comply with
the governing regulations (because, for example, Auxiant
takes too long to respond) or amounts to a breach of
fiduciary duty (because Auxiant misleads the insured
into believing that preauthorization constitutes a deter-
mination that the claim will be paid). Consistent with
such a declaration, the court might require Auxiant to
modify its preauthorization practices so as to bring
them into conformity with the governing regulations
as well as its broader fiduciary obligations to plan par-
ticipants. These might be entirely appropriate forms of
relief if, as Smith’s complaint alleges, what happened
to him was not an isolated occurrence but was con-
sistent with Auxiant’s routine preauthorization prac-
tices; declaratory and injunctive relief would serve to
define the parties’ respective rights and obligations and
to prevent the types of fiduciary breaches Smith has
alleged from recurring. Cf. Donovan v. Cunningham, 716
F.2d 1455, 1461-62 (5th Cir. 1983) (noting that voluntary
cessation of purportedly illegal activity by fiduciaries
does not necessarily render moot a suit for injunctive
relief, as such relief may be necessary to prevent recur-
rence of wrongdoing) (cited with approval in Secretary
of Labor v. Fitzsimmons, 805 F.2d 682, 693-94, 696-97 (7th
Cir. 1986) (en banc)). As the plan at issue is a health
insurance plan, it is foreseeable that Smith himself may
well seek preauthorization for medical services in
the future, so the possibility of recurrence is more than
theoretical. And, of course, whether or not a class is
certified, there are presumably many other plan partici-
No. 09-3865 15
pants who might benefit from a modification of
Auxiant’s practices.
Because Smith’s complaint sets forth a plausible claim
that Auxiant has breached its fiduciary obligations to
him, and because there are forms of appropriate
equitable relief that are available to address that
breach, the district court erred in dismissing his com-
plaint. That said, a cautionary note is in order.
We have assumed the truth of the facts that Smith has
alleged as we must at this stage of the litigation. Develop-
ment of the record may reveal that some of these facts
are untrue and may reveal additional facts that cast
Auxiant’s practices in a different light. Smith did not
attach to his complaint a copy of the health insurance
plan that covers him and the other employees of
Brenner Tanks, so we know nothing about what that
plan tells an insured regarding the nature of Auxiant’s
preauthorization decisions or about how an insured
may obtain coverage advice before undergoing medical
treatment. Cf. Kenseth, 610 F.3d at 476-77 (plan language
said nothing about how insured could obtain binding
coverage advice in advance of treatment and instead
encouraged participants to call customer service line
with coverage questions, without warning callers not
to rely on what they were told). Moreover, although
Smith now concedes that gastric bypass surgery was not
covered by the terms of the plan, we do not know how
clear the plan language makes that particular exclusion
to the reader and whether he should have understood
that exclusion when he sought preauthorization for the
16 No. 09-3865
procedure. Cf. id. at 474-75 (noting ambiguity of plan’s
exclusion for medical services related to non-covered
procedures). Similarly, we know nothing about what
an insured is told when he receives preauthorization
from Auxiant to undergo medical treatment. Pre-
authorization decisions are not necessarily coverage
decisions; preauthorization or precertification may
signal nothing more than the insurer’s conclusion that
the intended medical treatment is necessary and appro-
priate for the insured’s condition, without speaking to
the separate question of whether the intended treatment
is covered by the terms of the insurance plan. Apropos
of that distinction, preauthorization notices often con-
tain disclaimers warning the insured and his physician
that preauthorization or precertification does not con-
stitute the insurer’s agreement to pay for the treatment.
See Kenseth, 610 F.3d at 478-79 (citing Bonilla v. Principal
Fin. Grp., 281 F. Supp. 2d 1106, 1116-17 (D. Ariz. 2003), and
England v. John Alden Life Ins. Co., 846 F. Supp. 798, 801
(W.D. Mo. 1994)). We do not know what if anything the
preauthorization notice that Smith was given said in
this regard, although Auxiant’s counsel represented to
us at oral argument that Auxiant’s preauthorization
notice does contain some form of disclaimer and advice
to check the terms of the insurance plan as to coverage.
Facts such as these may reveal, contrary to Smith’s al-
legations, that Auxiant’s preauthorization of his gastric
bypass surgery did not reasonably cause him to believe
that the procedure would be covered by his workplace
insurance.
No. 09-3865 17
III.
Although legal relief is not available to Smith, his
complaint does set forth a plausible claim for declaratory
and injunctive relief based on Auxiant’s alleged breach
of its fiduciary obligations to Smith. In that respect, the
district court erred in dismissing his complaint. The case
is remanded to the district court for further proceedings
consistent with this opinion.
A FFIRMED IN P ART, R EVERSED IN P ART,
and R EMANDED
3-15-11