Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 80 C 6585 -- Marvin E. Aspen, Judge.
Cudahy, Posner and Coffey, Circuit Judges.
The plaintiffs, trustees of the Pattern Makers' Health and Welfare Trust ("Trustees," "Trust"), sued Blue Cross of Iowa and Blue Shield of Iowa ("BC" and "BS") alleging breach of contract, breach of fiduciary duty under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq., and fraud. The district court granted defendants' motions for summary judgment as to the contract and ERISA claims and remanded the pendent state law fraud claim to Iowa state court following dismissal of the federal claims. The Trust has appealed the summary judgment as to the contract and ERISA claims. We affirm.
The Trust is a joint labor-management trust established under collective bargaining agreements between the Pattern Makers' League of North America and the Midwest Pattern Manufacturers' Association for the purpose of providing employee health and welfare benefits. The defendants, BC and BS, are providers of health benefit plans to individual and group subscribers. On September 15, 1977, the Trustees appointed Dan Cusack ("Cusack") as their broker and instructed him to obtain bid proposals from companies qualified to underwrite the medical and life, accidental death and dismemberment, and disability and dental benefits for the Trust's Health and Welfare Plan (the "Plan"). Exhibit B to the Complaint. The Trust stated in its letter confirming Cusack's appointment as broker that his compensation would be paid by the insurance company ultimately selected by the Trustees; and on December 31, 1977, BC and BS, after their selection, entered into an Agency Agreement with Cusack under which BC and BS paid him 1% of the monthly group income received by BC and BS (hereinafter referred to collectively as "BC/BS") from the Plan.
In response to a solicitation of bids, BC/BS submitted the successful bid and became the Plan's medical carrier. A letter dated December 6, 1977, from Blue Cross District Sales Director Mike Stoll to Cusack describes in general terms the benefits which Blue Cross promised to provide for Trust members during the year 1978 at a monthly premium of $86.15 per Trust beneficiary. Exhibit C to the Complaint. In a letter to BC/BS dated December 6, 1977, the Trustees confirmed that BC/BS was being chosen as the medical carrier for the Plan, according to the terms described in the proposal received by Cusack; the Trustees' letter reiterated that "the cost [would] be a composite rate of $86.15 monthly for each member . . . and that such rate shall hold true during the 1978 year regardless of changes in population groups." Exhibit D to the Complaint. Thereafter, a Group Hospital and Medical-Surgical Service Agreement ("Service Agreement") describing the health benefits provided to Trust beneficiaries by BC/BS was prepared and executed by the parties in November 1978. Exhibit E to the Complaint. The parties agree that these three documents constitute the written contract (the "Contract") at issue here, although they disagree as to whether all the terms of that Contract are set forth in these three documents.
During 1978, BC/BS provided the agreed benefits in return for the monthly premium of $86.15 per Trust beneficiary. By the end of the initial year, BC/BS had accumulated a premium surplus of approximately $317,000. This surplus was the amount received by BC/BS in premiums minus the sum of the amounts paid out to cover claims and the following items: claims administration and general office expense, contingency reserves, group conversion charge, control plan expense, and "risk charge." Appellants' Brief at 11. Since "risk charge" represents a target profit figure, the Trustees argue that any amount retained over and above that risk charge constitutes an excessive profit to BC/BS.
In late 1978, the Trust elected to renew the agreement with BC/BS through 1979, but the monthly premium per member was reduced from $86.15 to $75.51 and some benefits were added to the coverage. At the end of 1979, a further premium surplus of $32,000 resulted, despite the premium reduction. An entirely new agreement was then drawn up between the Trust and BC/BS for 1980, under which any future premium surplus would be returned to the Trust. The parties expressly agreed that the 1980 Agreement would not prejudice either party's rights with respect to the previous two years. In fact, no further surplus accumulated, and BC/BS was terminated as carrier for the Trust in 1980.
As the medical carrier for the Plan, BC/BS administered the claims procedure under the Plan and determined the claims to be honored and the benefits to be paid. BC/BS also provided a Claims Review and Appeal Procedure, making the final decisions as to who received benefits under the Plan. In addition, as an organization providing benefits under a Plan governed by ERISA, BC/BS was required to provide certain information to the Trust for inclusion in the annual report which such a trust must under ERISA submit to the Secretary of Labor. See 29 U.S.C. § 1023(a)(2). Although BC/BS did provide such information to the Trust in 1978 and 1979, the Trustees allege that the required information was incompletely or inaccurately provided in various ways. The reports submitted on "Schedule A" forms were not certified, as required by the statute. Some reports failed to indicate that commissions were paid to Cusack and their amounts. On other forms, information about the premium surplus amounts was either omitted or provided inconsistently on differing sections of the forms. Many of the forms submitted also provided the required financial information on the section of the form labeled "experience-rated." This term refers to a retrospective type of rate-setting which requires the readjustment of rates for the previous year in the event either of a premium surplus or of a deficit.*fn1
Insisting that the 1978 and 1979 contracts with BC/BS were retrospectively rated, the Trust requested that BC/BS return the approximately $349,000 of premium surplus to the Plan. When BC/BS refused to do so, the Trustees filed a complaint on December 10, 1980, alleging, inter alia, that BC/BS had failed to discharge its fiduciary duties under ERISA and had also breached its obligations under the Contract. The district court granted the defendants' motion for summary judgment as to both claims. The court held that, although it had failed to comply strictly with the reporting requirements, BC/BS had not breached any fiduciary duty under ERISA and that the Contract between the parties unambiguously indicated that it had not agreed that the premium surplus was to be refunded. In their appeal here, the Trustees assert that the district court misinterpreted the fiduciary standards of ERISA in various ways, and in particular their application to an organization like BC/BS. The Trustees further argue that the district court erred in holding that the Contract between the parties was not ambiguous and in failing to consider extrinsic evidence of the parties' intent.
The Trustees raise two claims under ERISA, one based on the allegedly unreasonable compensation retained by BC/BS and one based upon violations of the ERISA reporting requirements. We shall deal with these two claims in order. First, it is charged that BC/BS breached its fiduciary obligation under ERISA by retaining what is alleged to be excessive compensation -- the premium surplus described above. The Trustees reach this conclusion by reading together ERISA Section 406, 29 U.S.C. § 1106, which prohibits various types of self-dealing by fiduciaries,*fn2 and Section 408, 29 U.S.C § 1108, which exempts transactions from this prohibition if no more than reasonable compensation is paid.*fn3 The Trustees thus urge upon us the conclusion that BC/BS, as a fiduciary under ERISA, was prohibited from accepting unreasonable compensation for its services and, hence, that the approximately $350,000 premium surplus must be returned to the Trust.
Without plunging into the difficult questions raised about the interrelationship of Sections 406 and 408, and of both sections to the more general fiduciary standard provided by ERISA Section 404, 29 U.S.C. § 1104, we note that these obligations are all premised upon the assumption that the party whose duty is asserted is a fiduciary under ERISA with respect to the conduct alleged. Our ...