Whitley v. BP, Stock Drops, and the Outer Limits of Fiduciary Responsibility
There is an old political saying that where you stand depends on where you sit, which, roughly translated, means that people tend to assert positions that are beneficial to their own organizations and employers, rather than based upon a consideration of broader issues. The author of the maxim, Rufus Miles, thinks the idea goes all the way back to Plato.
I often think of this maxim, known as Miles’ law, when ERISA litigators comment on prominent court decisions affecting ERISA claims, particularly breach of fiduciary duty actions. Lawyers from firms who primarily or exclusively represent major financial companies or plan sponsors always speak well of defense oriented decisions, and those who represent participants, particularly class action lawyers, always speak poorly of such decisions. The reverse, of course, tends to occur when a court issues a decision that seems to expand liability under ERISA or to favor participants on even a superficial or procedural level.
For me, probably because I represent the full range of actors in the ERISA universe, from participants to plan sponsors to third party administrators to fiduciaries and back again, I tend to be pretty agnostic about prominent decisions issued by courts on key ERISA issues. Some are good, some are bad, some are just plan poorly reasoned and worthy of criticism no matter which side of the “v” you favor.
One I am not particularly critical of is the clear trend line against participants in the so-called stock drop suits, involving claims of breach of fiduciary duty based upon collapse in the stock price of company stock held in employer plans, at least in cases where plan participants always had the option of diversifying out of those holdings but instead voluntarily kept too much of their retirement holdings in company stock. As I have written before, how many economic cycles does one have to live through to know that keeping a large portion of your retirement assets or other wealth, voluntarily, in the stock of your publicly traded employer might just not be the best idea?
But leaving that caveat aside, it is necessary to maintain some strong bars to such claims, because otherwise they simply become a back door avenue for plaintiffs’ firms to prosecute securities litigation, only in this instance, under ERISA, which – for all its reputation as a defense-oriented statute – is a more flexible basis for pursuing such claims than are the securities laws at this point. Stock drop claims more properly belong under the securities laws and its doctrines, and should be evaluated under them. Now don’t get me wrong: I am not saying there cannot be a fiduciary breach for purposes of ERISA related to employer stock that warrants a claim under ERISA under all circumstances, but only that stock collapse, without more, is really simply securities litigation in ERISA clothing.
I have always believed that the Supreme Court’s decision in Dudenhoeffer was a fine piece of line drawing in this regard, allowing such claims in a narrow class of circumstances but limiting them to a degree sufficient to maintain a firm distinction between securities law and ERISA’s fiduciary standards. I believe the post-Dudenhoeffer decisions out of the district courts and federal courts of appeal have demonstrated that this is an accurate view of that decision, including the most recent high profile decision on this issue, the Fifth Circuit’s decision this week in Whitley v. BP, PLC. Whitley was a stock drop claim arising from one of the more notorious environmental disasters in recent years, with the participants claiming that the loss in the value of their company stock holdings that resulted from it was attributable to fiduciary violations by the plan’s fiduciaries. As the Fifth Circuit explained:
On April 20, 2010, the BP-leased Deepwater Horizon offshore drilling rig exploded, causing a massive oil spill in the Gulf of Mexico and a subsequent decline in BP's stock price. The BP Stock Fund lost significant value, and the affected investors filed suit on June 24, 2010, alleging that the plan fiduciaries: (1) breached their duties of prudence and loyalty by allowing the Plans to acquire and hold overvalued BP stock; (2) breached their duty to provide adequate investment information to plan participants; and (3) breached their duty to monitor those responsible for managing the BP Stock Fund.
After much procedural maneuvering by the plaintiffs to try to plead a viable breach of fiduciary duty theory involving this fact pattern, the Fifth Circuit eventually dismissed the action, finding that the plaintiffs could not satisfy the standards for stock drop claims after Dudenhoeffer. Procedurally and doctrinally, it reads to me as a correct ruling. But there is more to it than that. If you step back and think about this case as a whole – and not just based on where you sit in terms of who should bear the losses from a stock drop, the employees or instead the employer – the decision makes even more sense. There is an awful long distance – both literally and metaphorically - between an offshore drilling rig and the plan fiduciaries sitting in an office somewhere deciding to offer company stock in a retirement plan. To borrow a concept from tort law, there is an almost inconceivable number of breaks in the chain of causation between the decision making of the fiduciaries and a loss stemming from this event. Although I fully understand how one can connect the dots, it is really pushing the outer limits of fiduciary responsibility to do so.
The Centre Barely Holds: ERISA Preemption after Gobeille v. Liberty Mutual Insurance Company
There have been an interesting series of federal court decisions concerning ERISA preemption during the past few months, some of which, in my view, cannot be fairly squared with the United States Supreme Court’s preemption decision earlier this year in Gobeille v. Liberty Mutual. I discussed in my recent article in Bloomberg BNA’s Tax Management Compensation Planning Journal, that the Supreme Court’s opinion in Gobeille raised two concerns: first, that it provides little principled guidance on the scope of preemption under ERISA and, second, that, if read literally, it is hard to conceive of a state statutory or regulatory initiative that would not be preempted. The article, which is titled The Centre Barely Holds: ERISA Preemption after Gobeille v. Liberty Mutual Insurance Company, argues that the opinion simultaneously gives great breadth to the scope of ERISA preemption and, at the same time, opens up avenues for disputing whether preemption applies in any particular case. All in all, as I discussed in the article, it is a fascinating but troubling opinion.
You can see that in this blog post from Joe Ronan and Steven Spencer of Morgan Lewis, in which they discuss the efforts the Sixth Circuit had to go this past summer to find that a particular state action was not preempted given the holding of Gobeille. Although slightly dated at this point, I thought of that post again when I was re-reading, and preparing to post, my article. It’s a perfect illustration of the Pandora’s box for litigants and courts that I believe the Supreme Court opened in Gobeille. Now to be fair, and as I reference in the article, ERISA preemption is one of those areas under ERISA where the statutory language makes it difficult to craft a consistent and workable doctrine, so the fault is not all the Court’s in this regard. But, nonetheless, it remains a problem that litigators, as well as state regulators, will continue to have to deal with for the foreseeable future.
Singing the Praises of ESOPs
I do a lot of litigation related to ESOPs, sometimes for them, and sometimes against them. One thing I have learned for sure over the years is that the well-run ESOPs, where everything is aboveboard and the fiduciaries are clearly acting – and want to act – in the interest of the employee participants, are spectacular creatures: they create wealth for employees, give rise to significant employee investment in the company’s success, and seem to at least correlate with growth in key company metrics. Many lawyers who represent ESOPs are almost evangelical in their fervor for the form.
For those of you who don’t spend a lot of time with ESOPs, or are just plain unfamiliar with the world of ESOPs, this article from the Atlantic really paints a good picture of why well-run ESOP companies are so valuable, in so many different senses of the word.
The Ninth Circuit Deems the Compensation of Outside Medical Reviewers Relevant in LTD Litigation, in Demer v MetLife
So the other particularly fascinating item – to me, anyway – that popped up in my twitter feed while I was on vacation was this important decision by the Ninth Circuit, Demer v. IBM and MetLife, addressing whether (and, if so, how) the number of reviews done by, and compensation earned by, outside medical reviewers used by an insurer to evaluate long term disability claims is relevant to arbitrary and capricious review. In short form, the majority of the panel found (at least implicitly) that evidence of this nature is discoverable in a case governed by arbitrary and capricious review, and must be considered by a court in passing on the question of whether a decision to deny benefits was arbitrary and capricious. A dissenter points out this evidence may be superficially appealing, but that if looked at critically, it should not be given any weight.
I have a number of thoughts on this decision. First, LTD insurers routinely use outside medical reviewers in exactly the way they were used in Demer, and there is nothing wrong with doing so. As I have often argued, the sheer complexity of many conditions require administrators to make use of outside medical reviewers, and it is questionable whether a proper review can be done in many cases without one or more such reviews.
Second, this issue has been a hotly debated topic for a number of years. There is a bias against discovery of evidence from outside of the administrative record, for a number of good reasons, including that it expands the scope and cost of LTD benefit litigation beyond the controlled, predictable amount that ERISA, and years of court decisions, instead treat as the norm. This type of discovery also runs contrary to years of decisions imposing a much more limited scope of litigation and discovery in these types of cases. That said, however, many courts have been expanding the scope of discovery and evidence allowed in these types of cases. I believe Demer is the highest profile decision to do so.
Third, I think there is no question that, from here on out, lawyers for participants will seek this information in almost every single LTD case in which outside medical reviewers were used. I don’t see how it would not now be malpractice for a lawyer not to seek such discovery. As a result, it may now be incumbent on all LTD insurers and claim administrators to ensure that structures are in place that will allow this type of information to both be easily compiled but also to be placed in context so that a court can see for itself whether or not the compensation of outside medical reviewers and the frequency of using those particular reviewers actually suggests bias in the benefit determination process. In other words, insurers and administrators should no longer act as though such discovery is unlikely, but instead as though it is likely to occur. This requires establishing IT protocols that make such data readily available. It also, though, means creating a system that puts the data of any given reviewer in context, so that an administrator can argue that a particular number of reviews in a given year or a particular level of compensation of a certain reviewer is meaningless and does not demonstrate or reflect that any bias or conflict of interest contaminated the administrator’s determination.
ACI's Forum on Minimizing Legal Risks in Executive Compensation
Another one of the things I fell behind on during vacation was passing along a special offer if you would like to attend the American Conference Institute’s November conference in New York on Executive Compensation, where I will be speaking on “Separations, Severances and Executive Departures.” The faculty as a whole for the two day conference is gold plated, and – which isn't always the case when I speak at conferences – I will probably attend all of the other speakers’ sessions as a result.
Today and tomorrow, you can obtain a special rate on the conference by contacting Joe Gallagher at ACI directly at 212-352-3220 ex 5511 or at firstname.lastname@example.org, mentioning my name as a speaker, and requesting the discounted rate.
Hope to see you there. And if you do attend, please track me down and say hello.
Thoughts From the Beach on the Excessive Fee Cases Against Prestigious Universities
Back from spending a week in the great state of Maine (you go, Palace Diner!), but even when I am away, “the sun comes up [a]nd the world still spins,” nowhere more, it seems, then in the world of ERISA litigation. So over the next few days, I am going to try to pass on some links and thoughts concerning a few things that caught my eye while I was away.
First off, of course, is the barrage of lawsuits against university retirement plans. I have previously tweeted my cynicism over the fact that all of the defendants are bold faced name universities, asking whether only prestigious universities have retirement plans or whether, instead, only they have ones large enough to attract plaintiffs’ lawyers. Obviously, neither is true and the comment, standing alone, is tongue in cheek. But I have to ask this question. Years ago, I tried, and essentially won (the plaintiff/patent holder gave up mid-trial after its expert spit the bit on the stand), a patent infringement case where the patent holder had embarked on a litigation campaign built around suing smaller fish who couldn’t afford to vigorously defend the suits so as to develop helpful rulings and precedents before taking on bigger fish (the campaign worked until they ran into my emerging company client, for whom we were able to work out a cost efficient defense strategy that allowed us take the case to trial and demonstrate the invalidity of the patent; see my article on that approach here). I am wondering if it works in reverse here, with regard to excessive fee claims against universities. Is the idea to win against large, prestigious and well-lawyered universities and their plans, creating precedents that make it easy to then pick off low hanging fruit in the form of the nation’s numerous non-bold faced name colleges and universities, who may then just settle quick if bigger name and richer universities have already, in years past, had to pay up? Time will tell, but it’s the strategy I would use.
I also wonder, but haven’t had the time to look into it, whether the universities selected for suit reflect a deliberate approach to forum shopping. In past articles, presentations and blog posts discussing the early excessive fee cases, I have argued that certain circuits were simply not the best place for the plaintiffs to have brought the first of those cases, and that it might be fair to say that the plaintiffs’ bar picked the wrong hills on which to fight at the outset of those cases. Here, I wonder if the determination of the universities to sue can be linked, in part, to the circuits in which they sit. I also wonder whether the nearly simultaneous filing of the current round of suits likewise reflects an intentional decision to move the cases along on a parallel track in multiple circuits, with at least two purposes in mind. The first might be thought of as hedging, which is kind of ironic since we are talking about lawsuits that strike at the massive amounts of retirement assets managed by the financial industry, to whom we all owe either debt or blame for the excessive use in modern discourse of the word “hedging.” But if you think about it from that perspective, the multiple suits in multiple circuits makes complete sense: all you have to do is hit in one circuit to make up for losses in other circuits. In other words, the plaintiffs’ lawyers are hedging their bets, assuming that even if the development of the law in one circuit on these theories of liability turns out unfavorable to them, the development of that law in others may not be. The second possible purpose could be seen as typical of a deliberate litigation strategy: to create conflicts among circuits, increasing the possibility of bringing the issues eventually to the Supreme Court if the law does not break in favor of the plaintiffs as these cases develop.
Anyway, that’s enough for a first day back in the office, other than to note why I was thinking about this while lying on the beach, which was Bloomberg BNA’s Jacklyn Wille’s excellent and on-going coverage of these suits, which included this piece that popped up in my twitter feed while I was away.
Moving on From the Churches, the ERISA Plaintiffs' Bar Takes Aim at the Universities
Well now. The world’s leading private attorney general of ERISA fee enforcement has now instituted four coordinated lawsuits against the retirement plans of major universities (MIT, Yale, NYU and Duke, as of this writing). I haven’t read the complaints yet, and have only read the industry articles on it (I like this one, and this one, and this one).
Nonetheless, anyone who downplays these lawsuits right off the bat is making a mistake. As I have written on many occasions, no one thought much of excessive fee suits when the first ones were filed against major private industry plans, and there was even more skepticism when the first church plan actions were filed. Hundreds of millions of dollars of settlements later, no one is laughing at these theories of liability under ERISA anymore. Since those who forget history are condemned to repeat it, it would be a mistake not to see these suits as the opening of a new, and potentially very expensive, front in ERISA litigation. It will be very interesting to see how these actions play out.
Two Reasons Why the Department of Labor's New Fiduciary Regulations Are Likely to Spawn More Litigation Against Financial Advisers
I wrote the other day about the Department of Labor’s legal position in response to lawsuits alleging that its new fiduciary regulations are illegal, and in that post, I referred to why the regulations have provoked such an outcry, which is that they fundamentally change the manner in which many financial advisers and financial firms operate. I came across a perfect demonstration of that point, which is this article explaining how a financial adviser will now have to act when a client asks advice on, or purchases a product for the purpose of, rolling over 401k assets into an IRA. As the article describes, that action will now, under the new rules, come with a host of steps and potential exposure as a fiduciary. Any of you who have done a rollover lately will certainly immediately see that what is described in the article is nowhere near what you just experienced with a rollover.
While the extent of the change is obvious, its worth asking whether the change is for the good or not: the lawsuits challenging the new regulations basically seek to set them aside on technical legal grounds without challenging whether they are valuable to the consumer of the financial products at issue, while the Department of Labor’s response to those legal challenges starts from the premise that the changes at issue are valuable to those consumers. The article on rollovers certainly describes a process that is more labor intensive, more transparent and puts more legal risk on the adviser involved in the process: however, whether that means better outcomes for consumers is the question, one that is at the heart of the dispute between the financial industry and the Department of Labor.
I would also note that the article does a good job, without actually addressing it, of illustrating why many critics of the new rule view at as being likely to increase litigation and as creating new causes of action that don’t currently exist under ERISA itself. First, as the article illustrates, the adviser – under the new rules - becomes a fiduciary subject to ERISA’s fiduciary duties, which have been the foundation for a wide, and ever expanding, range of legal claims. There is no reason to think that assigning fiduciary status to advisers won’t also have that effect here. Second, the contractual exemption for providing advice and collecting a fee in this context, which are detailed in the article, has a realm of provisions that a good lawyer can allege in a given case were breached, providing yet another avenue for constructing a claim against an adviser if an investment product goes south.
Want to Know Everything About the Litigation Over the New Fiduciary Regulations Without Having to Study?
The Department of Labor’s promulgation of its new fiduciary duty and best interest contract exemption regulations is, to this current lawyer and once upon a time public administration student, a case study in administrative law and regulatory action. Rightly or wrongly, whether you substantively agree or disagree with the regulatory initiative, and without regard to whether or not the promulgation is legal, the history of the promulgation provides enough material to teach multiple classes in multiple disciplines. The political battle over the regulatory and accompanying policy shift could sustain a graduate level seminar on public policy for an entire semester; the process of enacting the regulations is a case study in the administrative process; and the legal challenges to their enactment touch on effectively every key aspect of administrative law, statutory interpretation, and regulatory action.
As you can tell from that wind-up, there is a tremendous amount to say about this topic. At this point, we are past the political and regulatory aspects of the endeavor (for now anyway, at least until the next administration), and are onto the legal questions of the validity of the regulations. It took the Department of Labor 105 very well written pages to address those points in this brief filed on July 8th in the District Court for the District of Columbia, and even I have only skimmed it. I question whether anyone not directly involved with the case, or paid to follow it as part of their job, will ever read it any closer than that (although I might, but only if I bring it to the beach as my beach reading).
For those of you who want to understand the Department’s position without skipping the latest paperback thriller while on vacation, I highly recommend this detailed review of the Department’s arguments by Rebecca Moore at Planadviser. Briefly, and in only cursory fashion, I will note that I am fond of the Department of Labor’s argument that they are not boxed into the prior definition of fiduciary and precluded by the statute or congressional intent from changing it, but I will also note that I think the weakest part of their case is over the question of their authority to assert jurisdiction in this manner over IRAs. That and three dollars and a quarter will get you a cup of the daily drip at George Howell Coffee at the Godfrey Hotel nearby.
I would also note a much bigger picture issue, however. If you have only followed the dispute over this regulatory change from a distance, and have wondered about the reason for so much sound and fury, reading the Planadviser story should answer that question for you. You see from the story how much of the world is being upended by the initiative, and that, from the Department’s perspective, the point is to bring the relevant regulatory regime into balance with the realities of the modern financial world. That is quite an undertaking, and cannot help but overturn a lot of apple carts. In America today, if you overturn a lot of apple carts by government action, you get the bees buzzing, to mix my metaphors, in this case in the form of extensive litigation.
Floating a Few Thoughts on Kelley v. Fidelity
I don’t have too much to say about the specific details of this opinion in Kelley v. Fidelity Management Trust Company, out of the First Circuit yesterday on a putative class action against Fidelity related to the use of float income from plan transactions. This is particularly because it is primarily a technical decision, that involves following the money and the redemption and seeing how, in that specific context, the float income at issue did not become a plan asset, and thus cannot be the basis for a class action alleging breach of fiduciary duty.
That said, however, there are a couple of broader lessons to draw from it. First, the decision, when read in conjunction with Tussey and with the First Circuit’s own prior decisions on float related to insurance products, can be seen as blessing a certain float structure as one that will not give rise, simply on its own, to fiduciary liability under ERISA. Thus, any administrator planning to make use of float income will want to pay close attention to it in modeling their operation.
Second, however, is that the decision makes clear that it is only about whether the float income alone, in a context where the plan document allows for it, cannot support such a claim. The opinion, partially at the behest of the Department of Labor, goes out of its way to make clear that other theories of recovery where float income is at issue, such as theories that the use of the float income contradicted the plan’s terms themselves, are still open to litigation. As such, the opinion, while taking away one theory of liability, certainly invites the smarter minds in the plaintiffs’ class action bar to put on their thinking caps and look for a different theory to pursue recovery where float income is at play.