Gatti v. Reliance Standard

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

TERRI GATTI, 
Plaintiff-Appellee, No. 03-15562
v.
 D.C. No.
CV-01-00175-FRZ
RELIANCE STANDARD LIFE
INSURANCE COMPANY,
Defendant-Appellant.


TERRI GATTI, 
Plaintiff-Appellee, No. 03-16183
v.
 D.C. No.
CV-01-00175-FRZ
RELIANCE STANDARD LIFE
INSURANCE COMPANY, OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the District of Arizona
Frank Zapata, District Judge, Presiding

Argued and Submitted October 6, 2004
Submission Deferred October 8, 2004
Resubmitted May 31, 2005
San Francisco, California

Filed May 31, 2005

Before: Pamela Ann Rymer, Richard C. Tallman, and
Carlos T. Bea, Circuit Judges.

Opinion by Judge Tallman;
Concurrence by Judge Rymer

5841
5844 GATTI v. RELIANCE STANDARD LIFE INSURANCE

COUNSEL

Joshua Bachrach, Rawle & Henderson, LLP, Philadelphia,
Pennsylvania, for the appellant.

Barry Kirschner, Waterfall, Economidis, Caldwell, Hanshaw
& Villamana, P.C., Tuscon, Arizona, for the appellee.

OPINION

TALLMAN, Circuit Judge:

Reliance Standard Life Insurance Company (“Reliance”)
appeals the district court’s summary judgment in favor of
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5845
Terri Gatti in her action brought under the Employee Retire-
ment Income Security Act (“ERISA”) for reinstatement of
long term disability benefits. The district court reviewed Reli-
ance’s decision to terminate Gatti’s benefits de novo, because
it interpreted an ERISA regulation as placing a temporal limi-
tation on the administrator’s discretion and because it found
Reliance to have a serious conflict of interest. The district
court erred in applying de novo review. We reverse and
remand.

I

Appellant Reliance, which provided long term disability
coverage for employees of Paine Webber Group, approved
appellee Gatti for long term disability benefits effective May
24, 1993, based on complications related to Hepatitis B.
Almost seven years later, in April 2000, Reliance concluded
that Gatti was no longer suffering from complications related
to Hepatitis B, but that her disability was caused by a mental
disorder. Reliance apparently based this determination on
tests indicating that Gatti’s Hepatitis B was inactive as of
1997, and on physicians’ reports that she suffered from bipo-
lar disorder and chronic fatigue syndrome. Disability benefits
for mental illness were limited to twenty-four months under
Gatti’s policy, so Reliance determined that Gatti had already
received the maximum amount of benefits to which she was
entitled and discontinued her disability payments.

Gatti administratively appealed Reliance’s decision. Reli-
ance then had Dr. Stephen Feagin review Gatti’s medical
records. Based on his review, and without actually examining
Gatti, Dr. Feagin concluded that any disability suffered by
Gatti was caused by her psychiatric issues. On October 27,
2000, 177 days after it received Gatti’s request for administra-
tive review, Reliance reaffirmed its decision to discontinue
benefits.

Following that decision, Reliance gave Gatti an additional
opportunity to present “any additional medical evidence
5846 GATTI v. RELIANCE STANDARD LIFE INSURANCE
which she believes might allow [Reliance] to reinstate her
benefits.” Gatti did present new evidence, including a Decem-
ber 7, 2000, letter from Dr. Nicholas H. Rice stating that a
new HBV DNA test had been performed on Gatti which con-
firmed that she still had Hepatitis B. On February 6, 2001,
279 days after it received Gatti’s request for administrative
review, Reliance concluded that the additional submissions
were insufficient to warrant reversing its decision to discon-
tinue Gatti’s benefits.

Gatti filed a complaint against Reliance, and the district
court ruled for her on summary judgment. The court reviewed
Reliance’s decision to terminate benefits de novo because the
court reasoned that the termination of Gatti’s benefits was not
an act of discretion as Gatti’s claim was “deemed denied”
when Reliance violated the time deadlines for processing
administrative appeals established in the ERISA regulations.
The court also justified de novo review with its finding that
Reliance had an actual conflict of interest, demonstrated by
Reliance’s failure to follow the treating physician rule. The
district court concluded that Gatti was entitled to benefits
based on the treating physician rule.

II

We review de novo whether the district court applied the
appropriate standard of review. See Alford v. DCH Found.,
311 F.3d 955, 957 (9th Cir. 2002).

District courts review a decision to deny or terminate bene-
fits under an ERISA plan “under a de novo standard unless
the benefit plan gives the administrator or fiduciary discre-
tionary authority to determine eligibility for benefits or to
construe the terms of the plan.” Firestone Tire & Rubber Co.
v. Bruch, 489 U.S. 101, 115 (1989). When the plan gives the
administrator or fiduciary discretionary authority to determine
eligibility for benefits, that determination is reviewed for
abuse of discretion. Taft v. Equitable Life Assurance Soc’y, 9
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5847
F.3d 1469, 1471 (9th Cir. 1993); see also Firestone, 489 U.S.
at 114-15.

A

[1] The regulations implementing ERISA establish mini-
mum requirements for employee benefit plan procedures per-
taining to beneficiary claims. 29 C.F.R. § 2560.503-1 (1998).
These regulations include a sixty-day time limit for making a
decision on review, which may, under certain circumstances,
be extended to 120 days. 29 C.F.R. § 2560.503-1(h). If a deci-
sion has not been made within these time limits, the claim is
deemed denied on review. 29 C.F.R. § 2560.503-1(h)(4).1

[2] Relying upon Jebian v. Hewlett-Packard Co., 310 F.3d
1173 (9th Cir. 2002),2 the district court found that “because
Reliance failed to comply with the time limitations in 29
C.F.R. § 2560.503-1(h) when it decided Gatti’s request for
review, its decision was not an exercise of discretion.” We
conclude that Jebian does not control the issue presented here,
and hold that violations of the time limits established in 29
1
The pertinent regulation was amended in 2000; the alterations apply to
claims filed on or after January 1, 2002. See 65 Fed. Reg. 70,246 (Nov.
21, 2000); 29 C.F.R. § 2560.503-1(o) (2002). These alterations shorten the
time allowed for initial responses to forty-five days (from sixty) and
remove the language that says that violations of the time limitations will
result in the claim being “deemed denied.” 29 C.F.R. § 2560.503-1(f)(3)
(2002). The earlier version of the regulation applies to Gatti’s claim
because her claim was made prior to 2002. All further citations to the
Code of Federal Regulations are to the 1998 regulations unless otherwise
noted.
2
The Jebian decision on which the district court relied, and on which
the parties’ briefs were based, was withdrawn and superceded by Jebian
v. Hewlett-Packard Co., 349 F.3d 1098 (9th Cir. 2003). Although the lat-
ter opinion contains some clarifying dicta, the holding that “deemed
denied” language in a benefits plan cuts off an administrator’s discretion
remains the same. References to Jebian in this Opinion are to the amended
opinion published at 349 F.3d 1098.
5848 GATTI v. RELIANCE STANDARD LIFE INSURANCE
C.F.R. § 2560.503-1(h) are insufficient to alter the standard of
review.

The Jebian panel was presented with, but did not decide,
the issue of whether violating the ERISA regulation time lim-
its alters the standard of review. 349 F.3d at 1103. Factually,
Jebian was very similar to this case — both involve an
ERISA beneficiary’s claim that was denied more than 120
days after the date of appeal. 349 F.3d at 1102. However, one
factual distinction is critical: the language of the plan being
administered in Jebian contained the same time limits as are
found in the ERISA regulation, whereas Gatti’s plan with
Reliance did not include time limits. Id. at 1103-04. Gatti
relies on the ERISA regulation alone to establish that her
claim was “deemed denied” and not denied as an act of dis-
cretion.

[3] The Jebian opinion discusses the time limits established
by the plan and those imposed by regulation in tandem, but
the court’s ultimate holding was based solely on the time limi-
tation language in the plan. Noting that “[w]e are just as
bound by the Plan language deeming denial in the event that
time limits are exceeded as we are bound by the Plan lan-
guage that grants discretion to the Plan administrator[,]” the
Jebian court held that “we will not defer when a decision is,
under the Plan, necessarily the mechanical result of a time
expiration rather than an exercise of discretion.” 349 F.3d at
1104-05; see also id. at 1106 n.6 (distinguishing Judge Tashi-
ma’s dissent on the basis that the majority opinion relied on
the language of the plan). The Jebian decision recognizes that
there will be cases where benefits decisions are made in viola-
tion of the regulations alone, and explicitly leaves this issue
open. Id. at 1105-06.

[4] We reject Gatti’s suggestion that once a benefits admin-
istrator has violated the regulation’s time limitation, the
“deemed denied” language operates to cut off the administra-
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5849
tor’s discretion, making de novo review appropriate.3 Instead,
we read the “deemed denied” language to provide beneficia-
ries with a “final decision” from which to appeal if the admin-
istrator has not made a decision within the timelines
established in the regulation. Because a claimant must exhaust
her plan’s administrative review procedures before she may
bring suit in federal court, Amato v. Bernard, 618 F.2d 559,
566-68 (9th Cir. 1980), a mechanism is necessary to allow
claimants access to the courts in the event that their plan
never makes a decision. Thus, the “deemed denied” language
gives claimants the ability to access the courts if the adminis-
trator does not exercise its discretion within a reasonable time
(as established by the regulations).4

[5] Significantly, this is the way the U.S. Supreme Court,
Stevens J., read this regulatory provision:

This provision [29 C.F.R. § 2560.503(1)(h)(4)]
therefore enables a claimant to bring a civil action to
have the merits of his application determined, just as
he may bring an action to challenge an outright
denial of benefits.

Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 144 (1985)
(reversing a Ninth Circuit decision that held that the benefi-
ciary had a cause of action against the fiduciary administering
her benefits plan because it took the plan 132 days to respond
to the beneficiary’s appeal, which was ultimately successful).
3
This is the approach that has been taken in other contexts; we have
interpreted a statute that sets deadlines for action by the U.S. Fish and
Wildlife Service to prevent the Service from having additional time to
make discretionary findings. See Biodiversity Legal Found. v. Badgley,
309 F.3d 1166, 1178 (9th Cir. 2002) (“The exercise of discretion is fore-
closed when statutorily imposed deadlines are not met.”).
4
It appears that the beneficiary in Jebian took advantage of this protec-
tion. The 120-day time limit for the administrator to respond to Jebian’s
appeal expired on March 16, 1999. 349 F.3d at 1102. Over six months
later, Jebian had still not received a final decision on his appeal, so he filed
a complaint in district court on September 29, 1999. Id.
5850 GATTI v. RELIANCE STANDARD LIFE INSURANCE
[6] This interpretation is also consistent with the way
“deemed denied” is used in other parts of this ERISA regula-
tion. For example, 29 C.F.R. § 2560.503-1(e)(2) states in rele-
vant part:

If notice of the denial of a claim is not furnished in
accordance with paragraph (e)(1) of this section
within a reasonable period of time, the claim shall be
deemed denied and the claimant shall be permitted
to proceed to the review stage . . . .

29 C.F.R. § 2560.503-1(e)(2).5 We have previously found that
the purpose of this language was “to aid claimants in avoiding
the obstacles a plan may place in their paths to the appeals
board.” White v. Jacobs Eng’g Group, 896 F.2d 344, 351 (9th
Cir. 1989).

Further support for interpreting “deemed denied” to allow
claimants to seek judicial review, rather than to cut off admin-
istrators’ discretion, is provided by the amendments that were
made to the regulation in 2000. The current version of the rel-
evant regulation does not include the deemed denied lan-
guage. Instead, the regulation specifies that if a plan fails to
follow the requirements of the regulation:

[A] claimant shall be deemed to have exhausted the
administrative remedies available under the plan and
shall be entitled to pursue any available remedies
under section 502(a) of the Act on the basis that the
plan has failed to provide a reasonable claims proce-
dure that would yield a decision on the merits of the
claim.
5
The administrative history indicates that when this rule was promul-
gated, the deemed denied language was added to provide access to review.
42 Fed. Reg. 27,427 (1977) (“If the plan fails to act on the claim within
these periods of time, paragraph (e) provides that the claim is deemed
denied and the claimant may proceed to the review stage, described
below.”).
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5851
29 C.F.R. § 2560.503-1(l) (2002). The Department of Labor
did not explain its reasons for this change, but did note, in
explaining other changes, that section 503 of ERISA was
intended “to assure that claimants whose claims are denied
have the ability to take their claims to court without undue
delay.” 65 Fed. Reg. 70,246, 70,253 (Nov. 21, 2000).

Finally, this interpretation is the most consistent with the
way Gatti herself must have understood the regulation — she
continued to submit documentation to Reliance well after the
120-day deadline, suggesting that she did not believe her
claim to have been deemed denied.

[7] Nothing in the history of ERISA or its regulations, nor
in the precedent that binds us, indicates that the “deemed
denied” language is a temporal restriction on the administra-
tor’s discretion. We reject the interpretation of “deemed
denied” advanced by Gatti and accepted by the district court
and interpret the “deemed denied” language to mean only that
Gatti could have brought her lawsuit after the time limits
expired. Instead, she chose to continue participating in Reli-
ance’s claims review process until, as an act of discretion,
Reliance denied her appeal.

B

Another question left open in Jebian was “whether proce-
dural violations influence the standard of review.” 349 F.3d
at 1105. Although Jebian clarified that a claimant will only be
entitled to substantive remedies for procedural violations of
ERISA if the claimant can establish that the violation resulted
in “substantive harm,” we have not previously decided
whether procedural violations of ERISA regulations justify a
non-deferential standard of review.

[8] The case most relevant to this question is Blau v. Del
Monte Corp., 748 F.2d 1348 (9th Cir. 1984). In Blau, an
ERISA benefits administrator “made no attempt to comply”
5852 GATTI v. RELIANCE STANDARD LIFE INSURANCE
with ERISA’s procedural requirements. Id. at 1352. The Blau
opinion recognized that “[o]rdinarily, a claimant who suffers
because of a fiduciary’s failure to comply with ERISA’s pro-
cedural requirements is entitled to no substantive remedy.” Id.
at 1353. However, the Blau panel found an exception to this
rule:

When procedural violations rise to the level that they
have in this case, they alter the substantive relation-
ship between employer and employee that disclo-
sure, reporting and fiduciary duties sought to balance
somewhat more equally. The quantity of defendants’
procedural violations may then work a substantive
harm. Thus, in reviewing an administrator’s deci-
sion, a court must consider continuing procedural
violations in determining whether the decision to
deny benefits in a particular case was arbitrary and
capricious.

Id. at 1354. Under Blau, procedural violations of ERISA’s
requirements are evidence of arbitrary and capricious deci-
sionmaking, and can result in substantive remedies if they
caused the beneficiary substantive harm. Id.

The Blau panel explicitly left open the question at issue
here, but Blau’s language offers some guidance:

Despite its failure to assume any of ERISA’s obliga-
tions, [the plan administrator] urges upon us the def-
erential standard of review generally applicable to
administrator’s decisions under ERISA . . . . We do
not decide that this is the only applicable standard of
review when ERISA’s provisions have been flouted
in such a wholesale and flagrant manner.

Id. at 1352-53 (internal citations and quotation marks omit-
ted). In Blau, it was the “wholesale and flagrant” nature of the
benefits administrator’s violations that caused the panel to
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5853
decide that the violations altered the substantive relationship
between the employer and employee such that ERISA’s pur-
poses were defeated. Id. at 1354.

[9] It would be inconsistent with the opinion in Blau to
alter the standard of review on the basis of technical viola-
tions of ERISA’s requirements. It would also be inconsistent
with what has previously been assumed, but not discussed, in
our prior decisions which have applied deferential review
even when the plan has committed procedural violations. See,
e.g., Bogue v. Ampex Corp., 976 F.2d 1319, 1324-26 (9th Cir.
1992) (applying the abuse of discretion standard even though
the plan had admitted to procedural violations).

[10] The district court interpreted Jebian to allow de novo
review any time a benefits administrator violates the proce-
dural requirements in ERISA’s regulations, no matter how
small or inconsequential the violation. This interpretation of
Jebian is inconsistent with Blau, and we reject it. Instead, as
a corollary to Blau, we hold that procedural violations of
ERISA do not alter the standard of review unless those viola-
tions are so flagrant as to alter the substantive relationship
between the employer and employee, thereby causing the ben-
eficiary substantive harm.

III

[11] De novo review of a plan administrator’s decision is
justified where the plan administrator has a serious conflict of
interest that the beneficiary can demonstrate with “material,
probative evidence, beyond the mere fact of an apparent con-
flict, tending to show that the fiduciary’s self-interest caused
a breach of the administrator’s fiduciary obligations to the
beneficiary.” Atwood v. Newmont Gold Co., 45 F.3d 1317,
1323 (9th Cir. 1995). The district court found that a serious
conflict was evidenced by Reliance’s failure to follow the
treating physician rule, which required that a treating physi-
cian’s medical opinion be given controlling weight as long as
5854 GATTI v. RELIANCE STANDARD LIFE INSURANCE
it is well supported and consistent with other substantial evi-
dence. Although we once applied this rule to ERISA cases, it
is no longer good law. Black & Decker Disability Plan v.
Nord, 538 U.S. 822, 834 (2003) (holding that “courts have no
warrant to require administrators automatically to accord spe-
cial weight to the opinions of a claimant’s physician; nor may
courts impose on plan administrators a discrete burden of
explanation when they credit reliable evidence that conflicts
with a treating physician’s evaluation”). Because the district
court’s conclusion that a serious conflict existed was based on
the discredited treating physician rule, de novo review is not
justified on this basis.
IV
We remand this case for reconsideration under the appro-
priate standard of review, given that procedural violations of
ERISA should not alter the standard of review unless the ben-
eficiary suffers substantive harm, and that the treating physi-
cian rule is no longer good law. Unless the district court
concludes that de novo review is nonetheless justified based
on other evidence of substantive harm, the court should
review Reliance’s decision for abuse of discretion. See Fire-
stone, 489 U.S. at 114-15.
When considering the merits, the district court may prop-
erly consider anything that was part of the administrative
record before February 6, 2001, the date that Reliance made
its final decision. See Kearney v. Standard Ins. Co., 175 F.3d
1084, 1090 (9th Cir. 1999) (“If a court reviews the adminis-
trator’s decision, whether de novo as here, or for abuse of dis-
cretion, the record that was before the administrator furnishes
the primary basis for review.”). The district court should also
reconsider its award of fees and costs depending on the results
of the merits determination. See Barns v. Indep. Auto. Dealers
Ass’n of Cal., 64 F.3d 1389, 1397 (9th Cir. 1995); 29 U.S.C.
§ 1132(g).
VACATED, REVERSED and REMANDED.
 GATTI v. RELIANCE STANDARD LIFE INSURANCE 5855
RYMER, Circuit Judge, concurring in part and in the judg-
ment:

I agree that we must reverse because of the intervening
reversal of the “treating physician rule” in Black & Decker
Disability Plan v. Nord, 538 U.S. 822 (2003). However, I
would not go further pending the Supreme Court’s decision
whether to grant certiorari in Jebian v. Hewlett-Packard, 349
F.3d 1098 (9th Cir. 2003). We could either continue to defer
submission, or leave it for the district court to sort out on
remand. If pushed to reach the issue, I agree with Judge
Tashima’s dissent in Jebian but am hard-pressed to say that
“deemed denials” can mean one thing if embedded in a Plan
and another if established by regulation.