Initial Thoughts on the Supreme Court's Opinion in Tibble v. Edison
So what does it mean if you are an ERISA litigator who writes a blog and you are too busy litigating to write a post on Tibble v. Edison (even though you have published a widely read article on the case) right after the Supreme Court issues its opinion on the case? I don’t know, but it does remind me of this old joke:
Q: What do you call one lawyer in town? A: Unemployed.
Q: What do you call two lawyers in town? A: Overworked.
For now, until I have time to sit down and write a comprehensive post on the decision, I will content myself with passing along articles of interest on the decision, along with some general comments of my own. A good place to start is with the article in today’s Wall Street Journal, and with this piece in the Washington Post. This piece in Forbes caught my eye as it grabs hold of the most important aspect of the decision, which is that the Court found that fiduciaries have an on-going duty to monitor and review investments, but without outlining the parameters of that duty. Frankly, I wouldn’t have expected the Court to do so, as that is a very fact specific question and the exact parameters of that duty – once you accept that it exists – can vary from one set of circumstances to another. Thus, the Supreme Court has found that such a duty exists and that a fiduciary is not off the hook forever simply because the original investment decisions were prudent when first made, but left it for future litigation to establish what that duty looks like in different circumstances. This will continue to put ERISA litigators, quite happily, within the second category of lawyers in that old joke.
Will Church Plan Litigation Lead to an Attack on Governmental Plan Exemptions?
Dismayed at the attention her father was receiving from her teenage friends over dinner in a Chinese restaurant, Sally Draper remarked to the table that her father’s joke about stray cats and slow restaurant service was one he had been making for years. I thought of this when I saw Mike Reilly’s interesting post last week on the test for determining whether a plan is a governmental plan or not, because I have been leading off stories about governmental plan and other exemptions from ERISA for many years with the story of a client who, in 1975, was assigned this “new law” to oversee for his employer, with the “new law,” of course, being ERISA. My client liked to say how, back then, with no case law to guide them, they would handle the exemption by means of an “if it looks like a duck and quacks like a duck, then it’s a duck” analysis. In other words, if they thought a plan looked like a governmental plan, and it was related to a governmental enterprise, then they would treat it as a governmental plan.
Of course, over the years, legal rulings have given some framework to the analysis of governmental plans, and my client accordingly moved on from the “ if it looks like a duck” school of analysis for handling plans related to government or quasi-government enterprises. The problem, though, is that determining whether to treat or not treat a particular plan as a governmental plan is not always cut and dried, because of the variety of circumstances in which a plan related to governmental functions can come into existence, in this era of quasi-governmental agencies, private contracting out of government functions, and the overlapping role of private, public and union entities in some areas of government services. Mike Reilly’s post was on governmental plan exemptions in just this type of a context, where the role of collective bargaining, a teacher’s union, and a school district overlap in a manner that impacts determining whether the plan in question is a governmental plan.
As you can see both from Mike’s post and, even more, from the District Court decision itself that he discusses, there can be a lot of moving parts – or more accurately perhaps, hands in the pot – with regard to the provision of plans in such circumstances, and all of those moving parts have to be accounted for and analyzed in deciding whether or not there is a governmental plan.
The somewhat amorphous nature of the analysis reminds me, to some extent, of the church plan exemption and the current litigation over it. That exemption likewise was subject to a somewhat rickety legal structure, based to some extent on the intersection of private letter rulings with assumptions made by courts and plan administrators as to what it takes to qualify as a church plan. Church plan status, of course, is currently under attack by the plaintiffs’ bar, and the eventual outcome is up in the air. However, it is worth noting that panelists on the church plan litigation at the recent ACI ERISA Litigation Conference in Chicago raised the question of whether governmental plans will be the next target if the plaintiffs’ bar succeeds in overturning various plans’ claims to the church plan exemption. One thing I can tell you is that if that happens, we are going to see an awful lot of briefs and court opinions that explain the difference between the two exemptions by making a pun about the separation of church and state.
Should Company Officers Run Retirement and Other Benefit Plans?
This is great – I loved the idea of this Bloomberg BNA webinar the minute it popped up in my in-box, just from the title: “Just Say No: Why Directors Should Avoid Duties That Will Subject Them to ERISA.” I have written extensively on the idea of accidental fiduciaries, and the manner in which corporate officers find themselves dragged, unwittingly, into ERISA class actions because they played some role in the administration of a benefit plan, rendering them, at least arguably, deemed or functional fiduciaries for purposes of ERISA. Sometimes, they actually have played enough of an operational role to truly be proper defendants in an action; in others, they have only enough connection – such as having appointed the members of a committee that runs the plan – to be forced to litigate the question of whether they actually qualify as fiduciaries; and in other cases, their roles lie somewhere in between.
But there is also the question of the extent to which directors should deliberately place themselves in harms way by being the overlord of the company’s benefit plans, rather than leaving that in the hand of a lower level employee. I have represented officers who have taken on that role, and I have also sued officers who have taken on that role, and I have to say that, consistently, having a director actually be a plan fiduciary, intentionally, seldom appears, in the hindsight of litigation, to have been the best idea. Moreover, it has often appeared to be the case that a company officer or director took on the role because of its seeming importance but without any real analysis as to whether or not it made sense to take on that role. In many instances, there was almost a default, knee jerk reflex that something that important should be on a senior officer’s radar screen, but at the same time, that same officer did not really have the time or expertise to focus on it, leaving the officer exposed to potential liability if a problem arose with the plan and, further, leaving the plan open to more suits based on poor oversight than would have been the case if the oversight had been assigned to a lower level executive for whom the assignment was more of a central focus and possibly even one that could raise his or her profile.
In the end, litigation teaches that it isn’t so much the question of whether directors should ever be a plan fiduciary – accidentally or deliberately – that is important, but rather the act of thinking logically in advance about who best in a company should have what roles with regard to a plan. Doing the latter not only protects against unanticipated litigation exposures, but also decreases the likelihood of litigation by increasing the probability that the plan will be in the hands of the executives best placed to run it well.
Company Stock in Retirement Plans: Where Lies the Line Between Prudent and Imprudent Conduct?
Chris Carosa at Fiduciary News highlighted this New York Times article in his twitter feed the other day, in which the author argued that there is no reason, from the point of view of a participant/employee, to hold large amounts of company stock in a retirement portfolio (as opposed to, say, as part of a bonus plan or other compensation supplement that is external to a 401(k) plan or other retirement account). The author of the article makes a very persuasive case that, as a participant, holding company stock of their employer is a mistake, and violates basic, elementary rules of diversification and investment philosophy that any competent financial advisor would insist their clients live by. So, the author asks, how can it possibly make any sense to have company stock holdings in a 401(k) plan or to have company matches to retirement savings be in the form of company stock? The author’s answer, as you can tell from the summary above, is it doesn’t.
But if it doesn’t make any sense from the perspective of a participant, then how can it ever be a prudent decision for a fiduciary to offer it in the first place? A fiduciary is supposed to be acting as a knowledgeable expert and in the best interest of the participants, so if one accepts the premise that someone knowledgeable about retirement investing would not hold company stock in a 401(k) plan, then it would seem to never be in the interest of participants – and therefore compliant with a fiduciary’s obligations – to offer company stock in a retirement plan. Note that this question concerns general retirement savings of employee participants, and not ESOP holdings, which we know are deliberately and intentionally overweighted to holding company stock.
Now, this analysis needs one qualification. We all know that some companies do so well that employees and participants would be ill-served by not holding employer stock, and the returns on their retirement accounts would be severely reduced absent large holdings of company stock. All have heard the story of Microsoft millionaires (or Apple, or Facebook, or Google, or fill in the name of the tech company) but we also know that sometimes this has been true of employers in less glamorous industries as well (even if not to the same extent with regard to the appreciation of their stock). But these events are outliers in a bell curve, and are not the experience of most participants or of most employers offering company stock, just as the instances of company stock holdings going south, i.e., a stock drop, are outliers as well. For most participants in most plans in most companies, the potential gain certainly doesn’t outweigh the general risk, accepted in investment theory, of the accompanying excessive concentration of stock of any one company, which in this instance is the employer.
So, if this is the case, how can it ever be prudent to offer company stock in a 401(k) plan, and, if the stock falls in value, not have it be a fiduciary breach? Such an analysis would suggest that even holding or offering the company stock as an option is a fiduciary breach, as it is not prudent to offer it at all. But this is where ERISA meets the real world. The statute was not enacted in a vacuum, but was instead created by balancing competing interests. And the answer to the question, and the reason why such an argument would not succeed in a stock drop case, is that ERISA allows, to a certain extent, such holdings, so their very existence alone, without more, cannot constitute a fiduciary breach. The statute allows for it, so doing it can’t breach the statute.
And this, to a certain extent, is what Dudenhoeffer was about – the idea that a plan sponsor gets the protection of being allowed to do, without being accused of imprudent conduct, what the statute specifically allows, but is not insulated anymore than that from scrutiny of its conduct. So here, with regard to company stock, despite the idea that it is probably never prudent, as an individual retirement investor, to hold an excessive concentration of one company’s stock and in particular that of one’s employer, that alone cannot support a breach of fiduciary duty claim against a plan sponsor; instead, to impose fiduciary liability, that plan sponsor must have done something more than just offering that stock to employee participants.
What Does Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp. Tell Us About the Current Judicial Approach to Breach of Fiduciary Duty Cases?
For many years, I argued on this blog that courts, when it came to ERISA breach of fiduciary duty cases, were too slow to decide cases on the facts and too quick to decide them on the basis of judicial assumptions or, worse yet, legal presumptions. I criticized this roundly in my article "Retreat from the High Water Mark," where I discussed the different outcomes in excessive fees cases between those where the courts made certain assumptions about the mutual fund marketplace and those where the courts took evidence on that issue before deciding the case. As I have often written, both on this blog and elsewhere, the world often looks much different after evidence is taken than it does before.
Certainly, particularly after Iqbal and Twombly – which were needed correctives to certain aspects of federal practice – there is room for dismissing poorly pled or weakly supported breach of fiduciary duty cases right at the get go, by means of motions to dismiss. The problem, though, came when courts went beyond simply considering whether the acts alleged in the complaint were sufficient to describe a breach of fiduciary duty claim under generally accepted principles concerning such claims, for instance whether the complaint alleged fiduciary status and facts indicating a lack of prudence, and instead moved onto dismissing claims that satisfied those standards by creating presumptions that established separate and additional pleading barriers to prosecuting such a claim, as occurred with the Moench presumption, or by assuming knowledge of the investment practices and world at issue as a basis for dismissal that could not be found in the record at the time the motion was decided, as the Seventh Circuit arguably did in Hecker.
For those of you who have been paying attention, I haven’t written much on that theme lately, and there is a reason for it: presumably independent of anything I have written, courts have begun doing exactly what I argued for, and the pendulum has now firmly swung towards courts deciding such cases on their merits after considering the evidence. Indeed, Fifth Third Bancorp v. Dudenhoeffer, with its rejection of the Moench presumption, may have signaled to lower courts the need to decide all breach of fiduciary duty cases on their merits and not on the creation of legal presumptions or judicial assumptions based on sources beyond the ERISA statute itself or the evidence in a given case.
This jumped out at me when I read this Bloomberg BNA article on the Northern District of Illinois’ decision the other day (actually, while I was at depositions in Chicago, around the corner from the court, metaphorically speaking) in Teamsters Local 710 Pension Fund v. The Bank of N.Y. Mellon Corp., followed by a reading of the decision itself. The Bloomberg BNA article nicely sums up the events that gave rise to the lawsuit, explaining that:
In 2006, the Teamsters plan authorized BNY Mellon to lend securities from the plan's accounts in return for collateral that would then be invested in certain approved investments. The goal was to provide the plan incremental returns without exposure to the substantial risk often present in speculative investments.
As part of this securities lending program, BNY Mellon purchased almost $25 million in Lehman-backed floating rate notes.
As Lehman's financial condition deteriorated and ultimately collapsed, the Teamsters plan suffered a $24.5 million deficiency from the note held by BNY Mellon.
The plan filed suit against two BNY entities, accusing them of fiduciary imprudence and disloyalty under the Employee Retirement Income Security Act.
BNY Mellon sought to have the case resolved on the pleadings by arguing that Dudenhoffer established legal rules that bar the claim, on the thesis that the defendants, after Dudenhoffer, could not be liable for breach of fiduciary duty for having failed to “[recognize,] based on publicly-available information alone, that Lehman's debt was over-valued.”
The Court, though, rejected this argument, ruling that:
Defendants' argument about the impact of Fifth Third is based upon a reading of the complaint that is too narrow. The Court does not read the plaintiffs' complaint as alleging that the defendants lacked prescience or that they should have recognized from the information available in the market that the Lehman bonds were over-valued. Rather, the plaintiffs allege that, under the circumstances as they existed in the market at the time, no reasonably prudent securities lending fiduciary would have concluded that Lehman debt was a sufficiently safe investment for a securities lending client and no reasonably prudent securities lending fiduciary would have maintained the collateral investments in the Lehman Notes through Lehman's bankruptcy filing. Thus the claim is not that the defendants were imprudent in failing to recognize that Lehman would file for bankruptcy and not pay out on the notes, but that it was imprudent to hold the Lehman debt, given the circumstances existing in the market and given the plaintiffs' investment profile. Nothing in Fifth Third forecloses such claims.
In short, the Court concluded that the complaint pled the standard elements to show a breach of fiduciary duty, namely a lack of prudence under the then prevailing circumstances, and that such a claim was entitled to proceed to an adjudication on its merits, after discovery. This is a far cry from the day, not too long ago, that many such claims never made it past the pleading stage and into discovery, at which point a court could decide whether a fiduciary breach occurred by looking at all of the evidence, learned during discovery, of what was actually done, and under what circumstances, by the fiduciaries of a plan. As I have said before, the world often looks different in that light than it does when early, preliminary motions in a case are filed.
Breach of Fiduciary Duty, Preemption and Liberal Pleading Rules
I obtained dismissal of a breach of fiduciary duty claim, as well as state law claims, against my clients in an opinion filed on Friday. While long time readers know that I won’t comment substantively on rulings involving my clients, the opinion is worth a read on at least two substantive points involving breach of fiduciary duty claims. The first is the requirement of discretion on the part of a defendant for the defendant to become a fiduciary by means of administrative actions relating to an ERISA-governed plan; the second is the question of whether state law claims relating to an ERISA-governed plan are preempted when brought against a party that is not a fiduciary.
Separately, though, because this part of the opinion does not concern my clients, I can comment on a part of the opinion that will be very interesting to anyone who, like me, is a federal procedure geek. The Court engages in a sustained analysis of Federal Rule of Civil Procedure 15(a) and the right to amend as a matter of course, and how it applies in a circumstance where the original complaint, which the plaintiff seeks to amend, was in fact never served. The Court found the right to amend to still exist, regardless of the failure to serve the original complaint. The Court found that the modern rules reject hyper-technicalities when it comes to pleading, and that the rules therefore cannot bar an amended complaint simply because the original complaint was not first served. Interestingly, though, the Court recognized what is in essence a good faith requirement for a plaintiff to be allowed to avoid a bar that might otherwise be created by a perfectly literal reading of the federal rules, noting that its conclusion might be different if it were shown that the plaintiff were taking advantage of the liberality of the pleading rules for purposes of gaming, undermining or otherwise seeking to thwart the inherent purposes of the rules. Fun stuff, I think anyway.
Back to the Future: Learning from the Past and Looking into the Future of 401(k) Advisor Fees
So, my past two Mondays have been bookended by being quoted in a pair of excellent articles concerning the operation of 401(k) plans, one in Pensions & Investments and the other in Fiduciary News. The interesting thing about them is that one is about looking backwards, and the other about looking forwards. In the Pensions & Investments article (you can find the link here, but subscription is required; sometime copyright litigator that I am, I don’t do work arounds on these things), author Robert Steyer asks – and looks to answer – whether, and what, plans and their lawyers learn from settlements of major disputes involving other company’s benefit plans. The answer he finds, with help from me and a number of other lawyers who often look closely at settlements entered into by other lawyers’ clients, is that lawyers who represent plans see such settlements as a free look at what went wrong and how to plan future actions to avoid ending up sued for the same things.
In the second article, Chris Carosa of Fiduciary News looks into the future of plan advising, and at the type of compensation schemes that might work best in the brave new world of advising 401(k) plans. Chris points out that changes in the industry present an opportunity to adjust the compensation model for advisors to plans but I, wet blanket that I can sometimes be, point out in the article that such changes may raise questions of both liability and responsibility for a plan’s investments under ERISA.
Comparing and contrasting the two articles is worth doing, particularly if it provokes you to think a little bit about the inevitable process of dragging plan operations and advisor compensation into the future. As Don Draper once said, “Change is neither good or bad, it simply is.”
Me, Tibble, Pensions & Investments and Don Draper
With the Supreme Court hearing argument this month in Tibble, I thought I would pass along a link to this article in Pensions & Investments (registration may be required) on the case. Leaving aside (for the moment) the fact that I am quoted in the article, it is worth reading as a primer on the issues before the Court that are raised by the case. As the article makes plain, the case is not simply about the six year statute of limitations under ERISA, or about – as someone else quoted in the article notes – retail versus institutional share classes. Instead, it is a vehicle that could allow the Court to discuss many aspects of fiduciary duty in this context, and how they fit together with the statute of limitations. As such, the Court, if it uses the case in that way, could easily overturn a lot of apple carts, in much the same way that its discussion a few years ago in Amara, arguably in dicta and on an issue that was not expressly before the Court, upset a lot of assumptions about the scope of equitable relief under ERISA.
For my contribution to the article, I noted that:
“We need to clarify how the six-year statute runs,” said Stephen D. Rosenberg, of counsel at the Wagner Law Group, Boston. “The linchpin issue is whether a sponsor has a continuing duty. Do you have a continuing duty after six years?”
If the Supreme Court supports arguments by Edison 401(k) plan participants that fiduciaries can be held responsible beyond the six-year time limit, the ruling could encourage more fiduciary breach lawsuits, he said.
From a practical perspective, the answer to that question will impact plans in a number of ways, running from whether we will see a trickling off of class actions filed over excessive fees, to the costs of running such plans, to the level of diligence that plan sponsors and administrators will need to apply. All of these may vary depending on how the Court answers the question of when does the six year period start and end, and, perhaps more importantly, what events can start the six year period running again.
In some ways, to steal a line from an in-house benefits lawyer I know at a company with plans in place holding very large assets, it is almost like asking if you can sue Don Draper today for sexual harassment thirty years ago at Sterling Cooper. ERISA is no different than any other area of the law: there has to be a starting point and an ending point for the time period during which conduct can give rise to a suit. The multi-million dollar question posed by Tibble for the numerous plans out there is how do you determine those points in the context of investment decisions made by plans, where those investments may be held for many, many years.
ACI's 9th National Forum on ERISA Litigation
The American Conference Institute (ACI) hosts a comprehensive ERISA litigation conference twice a year, in New York in October and in Chicago in April. Fall in Manhattan and spring in Chicago. What’s not to like?
Beyond that though, the conferences have always provided a detailed and in-depth look at the hottest current topics in ERISA litigation, and I don’t say that just because I am speaking at the upcoming conference, in April, in Chicago. I also found this to be the case when I was attending in the past, in New York, as a member of the audience. Even most recently, at the 2014 conference in New York, where I spoke as a member of the panel discussing ethical concerns in ERISA litigation, I took a great deal away from the other presentations I attended, including the always interesting judicial panels, in which sitting judges discuss litigation and ERISA topics that have caught their attention.
In April, ACI will hold its 9th National Forum on ERISA litigation in Chicago, where I will be speaking, along with three well-known ERISA litigators, on current topics in benefit litigation. If you are interested in attending, ACI offers a discount to attendees who are invited by the speakers, and I would like to make that offer available to all of you who do me the good favor of reading my posts. If you would like to take advantage of that offer, all you need to do is contact ACI’s Joe Gallagher at 212-352-3220 ext. 5511, before January 30th, and mention my name.
How Do You Win an ERISA Estoppel Claim in the First Circuit?
I wanted to take advantage of the cold, dark, peaceful days of mid-January (do New Englanders still grow up reading Ethan Frome, with its perfect depiction of a classic, pre-global warming New England winter?) to talk briefly about an important First Circuit decision that slid somewhat under the radar when it was issued just before commencement of the holiday frenzy.
In Guerra-Delgado v. Popular, Inc., issued December 18th, the First Circuit continued its unwillingness to actually adopt estoppel claims in the context of ERISA as viable causes of action, a topic I discussed in detail here. The Court continued, in Guerra-Delgado, its tradition of deciding such claims by finding that, if such a claim could hypothetically exist, the plaintiff in the case before it had failed to make out its elements, a tradition I previously attributed to a desire to wait for a case that truly calls for adoption of the cause of action before acknowledging its existence. The Court, though, gave its clearest description yet of just what such a claim can and should look like; in essence, it described what the case will look like in the future that will finally get the First Circuit to formally acknowledge such a cause of action.
The Court explained that an equitable estoppel claim can be based on statements extrinsic to the plan documents where they concern an ambiguous term in the plan, but not otherwise. Thus, the first hurdle for proving an estoppel claim in the First Circuit – if you are lucky enough to be the lawyer or participant in the case where the Court finally agrees that such a claim exists under the law – is to demonstrate that the plan is ambiguous with regard to a provision related to the extrinsic statement in question. The Court declared (I don’t think we can say the Court “held,” since the Court effectively decided only a hypothetical, as it did not acknowledge the existence of such a claim) that ambiguity exists for these purposes “if the ‘terms are inconsistent on their face’ or the language ‘can support reasonable differences of opinion as to [its] meaning.’” The Court then proceeded to find that neither of these were true with regard to the plan terms at issue in the case before it.
And why should this be the rule (if and when the First Circuit finally approves of such a claim)? The Court gave a cogent explanation:
representations that interpret rather than modify the plan may provide “a narrow window for estoppel recovery.” Law, 956 F.2d at 370. We have observed that “a plan beneficiary might reasonably rely on an informal statement interpreting an ambiguous plan provision; if the provision is clear, however, an informal statement in conflict with it is in effect purporting to modify the plan term, rendering any reliance on it inherently unreasonable.” Livick, 524 F.3d at 31. We have explained that “[t]his is why courts which do recognize ERISA-estoppel do so only when the plan terms are ambiguous.” Id.
Even though it slipped in under the radar, Guerra-Delgado is not a case to be ignored if you are litigating an ERISA estoppel claim in the district courts of the First Circuit. It nicely ties together years of decisions in this circuit related to this topic, at both the appellate and district court levels, that are not always inherently consistent with one another, and gives you the road map for winning such a claim.