In Donachie v. Liberty Life Assur. Co. of Boston, the US Court of Appeals for the Second Circuit held that a district court incorrectly denied attorneys' fees to a plan participant who prevailed on the merits in an ERISA case (Nos. 12–2996–CV, 12–3031, (2d. Cir. March 11, 2014)). In considering requests for attorneys' fees in ERISA cases in the Second Circuit, courts must apply the "success on the merits" standard established by the Supreme Court in Hardt v. Reliance Standard Life Ins. Co. (560 U.S. 242 (2010)). In addition, courts in the Second Circuit may, but are not required to, apply the five-factor test for awarding attorneys' fees under Chambless v. Masters, Mates & Pilots Pension Plan (815 F.2d 869 (2d Cir. 1987)). The district court in Donachie incorrectly applied the Second Circuit's Chambless factors by focusing exclusively on whether the plan's insurer acted in bad faith in denying the participant's claim for benefits, while ignoring the factors of culpability and relative merits.

The plan participant in Donachie sought long-term disability (LTD) benefits under his employer's insured disability plan, but the plan's insurer denied the participant's claim. After exhausting the plan's administrative procedures, the participant sued the insurer under ERISA and prevailed on the merits in the US District Court for the Eastern District of New York. However, the district court denied the participant's request for attorneys' fees because it found that the insurer did not act in bad faith in denying the participant's LTD benefits. The participant appealed the case to the Second Circuit.

The Second Circuit affirmed the district court's decision in favor of the participant as to his claim for LTD benefits, but reversed the district court's denial of attorneys' fees. Reviewing that denial for an abuse of discretion, the Second Circuit held that the lower court misapplied Second Circuit law regarding when to award attorneys' fees under ERISA.

Under Second Circuit law, courts must first apply the Supreme Court's Hardt decision and determine whether a plaintiff has obtained some degree of success on the merits. There was no question that the participant in Donachie met this standard. In addition, courts in the Second Circuit may, in their discretion, apply the governing Chambless factors in determining whether to award fees. These five factors are:

The Second Circuit emphasized that courts do not have "unbridled discretion" when deciding requests for attorneys' fees. According to the Second Circuit, the district court in Donachie misapplied the Chambless factors by:

By relying solely on the bad faith factor, the district court committed an error of law and abused its discretion. In the Second Circuit's view:

As a result, the Second Circuit vacated the district court's denial of attorneys' fees and remanded the case to the district court with instructions to award the participant attorneys' fees, to be calculated on remand.

For plaintiffs' attorneys seeking ERISA attorneys' fees in the Second Circuit, this decision clarifies how district courts may apply the Chambless factors in addition to the required "success on the merits" standard under the Supreme Court's Hardt decision. Moreover, the Second Circuit was careful to note that the "bad faith" and "culpability" aspects of the first Chambless factor are analytically distinct, and either one may be used to satisfy the first factor.