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.
What Lies at the Intersection of §502(a)(3) and ACI's 13th National Forum on ERISA Litigation?
Is there anything more interesting right now than ERISA §502(a)(3)? For those of you who don’t know it off the top of your head, and don’t feel like googling it right this second, this is the section of ERISA’s remedies provision that authorizes suits for equitable relief. For the longest time, this was a nearly dormant provision, with so many doctrinal barriers to its use that many ERISA practitioners had come to view it as akin to the proverbial prodigal son, a cause of action sent off to wander in the desert, with no one really quite sure of its whereabouts (other than existing as text in the U.S. Code). Several years ago, though, thanks to the Supreme Court’s opinion in Amara, it came back from its long exile to the desert with a vengeance, becoming the centerpiece of an explosion of case law and theoretical approaches to liability. From a 30,000 foot perspective, the most interesting, broad brush aspect of the reinvigoration of this area of ERISA litigation is the tension between the expansion of liability theories this development has given to participants and the simultaneous barriers it has thrown up for plan sponsors. Amara encouraged the growth of claims for equitable relief by participants, under disgorgement and estoppel theories that are still being fleshed out by the courts. At the same time, the developing case law on equitable relief has complicated the ability of plan sponsors and fiduciaries to recoup payments from participants, either of overpayments or by subrogation to tort recoveries, as was the case in the recent Supreme Court case of Montanile v. Board of Trustees of National Elevator Industry Health Benefit Plan.
I will be discussing this push and pull, and other aspects of this topic, in October at the American Conference Institute’s 13th National Forum on ERISA Litigation. As a speaker, I have access to a reduced rate for attendees, and wanted to pass it along to any readers who may be planning to attend. To obtain the special rate, just mention my name and email Joe Gallagher at ACI to register, by July 26th.
Challenging the Department of Labor's Authority to Regulate the Annuity Marketplace: National Association for Fixed Annuities v. Thomas Perez and the Department of Labor
I wrote yesterday on the first complaint filed, in federal court in Texas, challenging the Department of Labor’s new fiduciary regulations, and then within hours, a second such suit was filed. The second suit is a more narrowly targeted action, brought by sellers of fixed annuities and charging that the Department of Labor, for various reasons, overreached when it included insurance agents and this product within the scope of the regulation. As Nevin Adams writes on NAPA Net:
As it relates to the impact of the fiduciary regulation on fixed income annuities (FIA), the filing notes that in the Labor Department’s NOPR, both declared rate fixed annuities and FIAs were included in PTE 84-24, but that “without adequate notice as required under the APA, in the final Rule the Department moved FIAs out of PTE 84-24 and into the BICE.” The plaintiffs go on to note that all fixed annuities — including FIAs — had previously been treated as insurance products, exempt from federal securities laws and regulated under state insurance laws. “Yet the Department lumped FIAs in with securities products like variable annuities when it promulgated the Rule and the Exemptions.”
The plaintiffs here note that because FIAs are an insurance product, the FIA sellers represented by NAFA — including carriers, IMOs, and agents — “are ill-equipped to suddenly be subjected to the onerous compliance obligations required by the BICE, which more closely resemble the types of requirements imposed on the securities industry.” They go on to say that the FIA industry was “blind-sided by this last-minute switch” and that the impact to the industry and its clientele would be “highly detrimental.”
While the complaint filed in Texas yesterday is fairly read as a broad attack on the entire expansion of the fiduciary status and the BIC to retail customers, this complaint is more fairly understood as – through a number of different legal arguments – a claim that the Department simply cannot properly regulate insurance agents and the sale of this type of product, or if it can, did not follow proper procedures to do so. I like the precise focus of this argument which essentially asks, from a 30,000 foot perspective, whether ERISA itself captures such products and sellers.
And that’s an interesting question, which has a lot to do with your jurisprudential philosophy. Its almost an original intent question – do you believe that ERISA, and the Department, is limited to the issues and products on the table in 1974? If not, how much further down the field from the exact problems tackled by Congress at that time do you think the regulator can go? Or do you believe that ERISA is a federal statute intended, from the outset, to be developed along the way by regulators and the federal courts, so as to fit current circumstances and to avoid being hamstrung by changes in the retirement world over the past 40 years? To even begin to unpack these questions into subsidiary parts would turn this blog post into a law review article, so I won’t even hint at the answers in this post. But in a way, that’s what this second lawsuit asks.
Initial Comments on Chamber of Commerce v. Thomas Perez and the Department of Labor
There’s a famous saying that war is politics continued by other means, and I have paraphrased it in the past to point out that patent infringement litigation is frequently simply business competition continued by other means. I think it is similarly fair to say that the lawsuit seeking to overturn the Department of Labor’s new conflict of interest/fiduciary regulations is the continuation of politics by other means. Having lost over the issue before the administration and having failed to convince Congress to halt this major piece of rule making, opponents of the regulatory initiative have turned to the courts, making, essentially, the same arguments against the regulations that they previously made in the political venues: that it is onerous, oversteps the Department’s expertise and authority, is procedurally invalid, and too costly. You can find the complaint itself here.
There is a lot more to be said about the complaint, its allegations and the legal theories it presses, and I intend to comment more extensively as the case proceeds. However, for now, I would simply highlight the extent to which, as a piece of advocacy, the complaint itself is a beautiful piece of work. Perhaps even more than as advocacy, it really works as a piece of storytelling. Don’t misunderstand me when I say that – that is not meant as a criticism. I have always been an advocate of, when you have a good story to tell, telling it in the complaint, even if it goes far beyond what the federal rules require to avoid dismissal. I follow that practice myself in my own filings. There are multiple reasons for doing so, including that it allows a plaintiff to set the initial terms of discussion, and to place the case in the context that is best for the plaintiff. A skilled defense counsel will thereafter push back and seek to reframe the discussion in later filings (such as in a motion to dismiss), but will still have been forced by the complaint to engage with the narrative chosen by the plaintiff. Moreover, in complex areas of the law like ERISA, it is important to remember that our judiciary consists of generalists, with judges naturally having more experience in certain areas than in others. On the same panel of judges not too long ago, I heard one judge from a coastal state joke that, prior to being appointed to the bench, he thought ERISA was a special type of maritime winch, while another judge on the same panel pointed out that he had litigated ERISA cases for years before joining the bench. A complaint that contains a well-written narrative, as this one does, allows a plaintiff to characterize the case, at the outset, for an audience that may or may not be exceptionally versed in the subject area at issue in the case.
Even so, though, and as is especially important with regard to this action, it is important not to get lost in the story being presented in the complaint, and to remember that the legal issues themselves are what matter – and that they are often simultaneously more mundane and nuanced than the surrounding details would suggest. I think that is worth keeping in mind in reading this complaint, as the actual legal issues are much more subtle than the broad discussion of financial services regulation in the complaint might suggest: the case isn’t, in the end, going to be about the propriety or scope of regulating the financial industry, but instead about the scope of the Department’s authority and the procedural manner in which it acted. The long run up of factual allegations in the complaint would suggest otherwise, but the causes of action themselves make that clear.
A Busy ERISA Week in the Ninth Circuit: Moyle v. Liberty Mutual and Rich v. Shrader
Last week, I spoke on a panel with, among others, Trucker Huss’ Joe Faucher, who discussed some aspects of Ninth Circuit ERISA jurisprudence with a mostly East Coast-centric audience. A week later, that circuit has turned out two of the more interesting and potentially significant appellate decisions in ERISA that any court has produced in awhile.
In the first one, Moyle v. Liberty Mutual Retirement Benefits Plan, the Ninth Circuit tackled an old chestnut in ERISA litigation, namely the argument that a plaintiff could not bring an action alleging both the wrongful denial of benefits and seeking equitable relief under ERISA as well. Many courts – and pretty much every defendant ever sued by a plaintiff making both claims – have taken the position over the years that Supreme Court precedent precludes bringing both claims, and that, if a plaintiff pled both claims, the equitable relief claim could and should be dismissed at the outset of the case. As a long-time commercial litigator who has litigated a range of cases from IP disputes to reinsurance cases to everything in-between, this always struck me as an odd proposition, because it ran contrary to the standard rule in the federal court system allowing a plaintiff to plead in the alternative, meaning that a plaintiff could allege multiple claims even if they were sufficiently inconsistent that, at the end of the day, the plaintiff could recover on only one of the claims. In Moyle, the Ninth Circuit, following the lead of an excellent analysis of the issue by the Eighth Circuit, found that, in light of the Supreme Court’s decision in Amara, a plaintiff could pursue denied benefits and equitable relief under ERISA in the same case. You can find what I hope is a cogent explanation of why, after Amara, it is clear that both such claims can be brought in the same action in this reply brief, which I recently filed in the First Circuit (the discussion begins at page 22 of the brief). The Ninth Circuit’s decision now reinforces the Eighth Circuit’s conclusion to this effect.
By the way, even aside from its significance to ERISA litigation, I took note of Moyle for a personal reason. In this profession of specialists – and I am one as well – people are often interested to find out that I have, over the years, maintained an active (sometimes more active, sometimes less active) intellectual property litigation practice, alongside my much larger ERISA practice. I have tried patent infringement cases, done more consumer product copyright infringement cases than I can count, and done a fair amount of software infringement litigation and counseling. It all goes back originally, though, to Golden Eagle Insurance Company, the once defunct California insurer whose employees are at the heart of the Moyle case. Through a client at Golden Eagle, I represented Golden Eagle’s California insureds in IP litigation from the Southern District of New York to Rhode Island and in Massachusetts (I don’t recall any of those cases going further north, and I know they didn’t go further south) starting in the 1990s, and my IP practice grew from there. Its funny to see these different sides of my practice come together in Moyle, with a major ERISA decision stemming from a client that was instrumental in building my IP practice.
The other case decided by the Ninth Circuit is less novel, but still important. In Rich v. Shrader, the Ninth Circuit held that a stock option program for officers was not subject to ERISA, because its intended purpose wasn’t to provide retirement income. Whether ERISA reaches particular stock grant or other compensation plans is often a hotly contested issue in disputes between companies and their former officers, and Rich is a fine example both of that circumstance, and of how to analyze whether ERISA is applicable. You can find an excellent summary of it in this Bloomberg BNA write up of the case.
The Cost/Benefit Analysis of Self-Funding Employee Health Benefits
I enjoyed this article from CFO on whether smaller employers should switch over to self-funded health plans, to take advantage of potential cost savings in comparison to insured plans, and to obtain comparatively favorable treatment under the ACA. I would throw in another point that favors self-funding a plan, which is that ERISA preemption provides more freedom from state health insurance mandates in that circumstance than would otherwise be the case.
Of more import, though, is the author’s warning that there are multiple hidden risks in self-funding that can threaten the financial well-being of a smaller employer, but which larger self-insurers have the financial depth to weather. There is no doubt that this is true, and that a smaller employer that wants to self-fund its health benefits must plan well for those risks, for instance through its stop-loss insurance structure, with enough sophistication and foresight that it has controlled for those risks.
There are other hidden risks as well, however, which are predominately operational, but which the article doesn’t address. I have spent years litigating disputes between administrators and plan sponsors over problems in the administration and management of self-funded plans. These problems have ranged from whether the administrator has properly determined eligibility or coordinated benefits, to whether the administrator approved care that the plan did not cover, to allegations of outright operational incompetence. Large self-funded employers often avoid these types of problems with the administrators of their self-funded plans, because they have the deep pockets to hire major, brand name administrators. Smaller employers sometimes end up with smaller, less sophisticated administrators, either because of cost or because they simply don’t know what to look for in picking an administrator. These operational risks place a smaller employer with a self-funded plan at risk of losses, and need to be accounted for by smaller companies in, first, deciding whether to self-fund health benefits and, second, in planning how to do so.
In the end, as most if not all employers know, there is no easy answer to providing health benefits in as cost effective a manner as possible. Self-funding is one good avenue, but its no panacea: it has to be done carefully to work well.
Excessive Fee Litigation Against Small Plans - Damberg v. LaMettry's Collision
My partner, Marcia Wagner, is quoted in this article about a somewhat stunning development, the filing of a class action excessive fee case against a relatively small plan, with around $9 million in assets. I have been asked for some time, by media and by audience members at speaking engagements, if and when we will see small plans sued for excessive fees. I have always felt that such suits were likely at some point, but that the issue was subject to the push and pull of conflicting forces. On the one side, the work done to date on the large dollar cases has plowed the field, doctrinally and in terms of lawyers’ understanding of the financial issues, to an extent that smaller cases are within the technical grasp of a number of lawyers who might be willing to bring smaller value cases (obviously, the firms who have won the large dollar settlements to date are not themselves going to be very interested in playing for small stakes and bringing suit over plans with only a few million in assets). Arrayed on the other side, though, and arguing against the proliferation of such suits involving small plans, is a relative constellation of forces, including; (1) the fact that there are only a limited number of lawyers capable of successfully bringing such claims and few of them would be interested in suing for small amounts; and (2) these are not easy cases to win, factually or doctrinally, and thus the risk to reward ratio may not be worth it in such cases.
The question of whether such suits will proliferate may depend on a number of factors. First off, will the first companies with smaller plans who are sued put up vigorous defenses? If so, the cost/benefit analysis for plaintiffs’ lawyers who might consider bringing such claims changes to the worse for them; it becomes harder, and riskier, to try to obtain a settlement or recover a verdict. Having to go to trial to recover where a potential verdict or settlement is in the tens of millions is one thing; having to do that to recover several hundred thousand, and then only if you prevail, is another. Second, to quote Butch Cassidy and the Sundance Kid, who are these guys? Are the lawyers bringing the suits the real deal, or are they the ERISA equivalent of patent troll lawyers, simply bringing a rash of suits and looking for a quick and inexpensive settlement? If it’s the latter, and sponsors of small plans think its better just to pay a small amount – even if just in lieu of paying to defend the case – as a cost of doing business, then you can be sure we will see plenty of these types of cases.