Excessive Fee Litigation Remains a Hot Topic
There’s a nice overview from Bloomberg BNA on plan fee litigation, and its status in the courts at this point in time. The article opens up by setting the stage:
Plan fee litigation had a big year in 2013, with divisive appellate court decisions affecting standards of judicial review, statutes of limitations and functional fiduciary status that may open the door for increased and novel litigation, employee benefits attorneys said during a conference panel presentation.
Its interesting to read the rest of the article, which summarizes the current status of cases such as Tibble and Leimkuehler, and discusses the totally conflicting views of the defense bar and the plaintiffs’ bar over these cases. If there were ever a case of two sides not being able to agree on whether it is day or night, it is the two sides of the bar arguing over the propriety of judicial decisions over ERISA liability, particularly with regard to excessive fee litigation. I thought there was a divide bordering on the ecumenical decades ago, in my earlier life as an insurance coverage litigator (which I still sometimes am, when not busy with ERISA fiduciary problems or other types of litigation) between policyholder and insurer lawyers over oddities like the asbestosis exclusion, the meaning of the words “expected or intended,” or what the words “sudden and accidental” actually mean, but they had nothing on the current divide between the plaintiff and defense bars when it comes to high stakes ERISA litigation (a division I wrote about at length here).
Substantively, though, the best takeaway from the article comes in its last line, in a quote from someone with the Department of Labor, who notes on one particular issue raised by the fee cases that it is “an interesting issue, and I don't think we've heard the last of it.” One can say that across the board about all of the excessive fee litigation, and its spin off of other types of cases all targeting the question of whether plan participants are paying more than they should for plan benefits. Tibble itself is a wonderful example of the extent to which excessive fee litigation is a gift that keeps on giving, of a sort, for everyone from the lawyers involved, to plan participants (in those instances where they either obtain a recovery as part of a class or receive the incidental benefit of having lower plan expenses because sponsors are responding to the threat, real or perceived, of excessive fee litigation), and, yes, commentators. I wrote substantially about Tibble way back at the trial court level, in 2011, and here we still are, these many years later, writing and talking about the further history of that case.
The Fiduciary Exception to the Attorney-Client Privilege: What It Is and Why It Matters
One of the great advantages a Massachusetts ERISA litigator has is that our federal magistrate judges are very good with ERISA issues, which is something that is well illustrated by this decision on the scope of the fiduciary exception to the attorney-client privilege in ERISA litigation. In Kenney v. State Street, the magistrate judge dealt, in a very clean and easily understood manner, with the key issues that come into play under that doctrine, which have to do with its borders: to be exact, what attorney-client communications are subject to disclosure under this exception, and what ones are not. This is a more complicated issue of line drawing than it might appear at first glance because, in essence, you are considering the same course of communications, between the same lawyers and the same plan representatives, dealing with the same general topic (the plan’s operations), sometimes as part of the same in-person meeting, and deciding where the line falls as to the communications that must be produced and those that do not have to be produced.
The takeaway from Kenney on this line drawing is summarized nicely in this blog post by an unidentified Paul Hastings lawyer or two:
First, the attorney-client privilege is available for settlor matters, such as "adopting, amending, or terminating an ERISA plan" because those decisions do not involve ERISA fiduciary functions of managing or administering the plan.
Second, the attorney-client privilege is available to a plan fiduciary who seeks the advice of counsel in response to a threat of litigation by plan beneficiaries (or the government) against the fiduciary.
This is not an issue, by the way, that is just of academic interest, or something for clients and litigators to be concerned about after the fact, when a lawsuit is pending. A few years back there was a major top hat plan case in which some of the key evidence relied upon by the plaintiff consisted of emails and communications between the plan sponsor and its lawyers that were discoverable under these standards: that evidence was very helpful to the plaintiff, and was information that simply should not have been communicated in the manner it was (without, for instance, context and qualification) if it was ever going to see the light of day, rather than being forever cloaked behind the attorney-client privilege. Plans and their outside ERISA lawyers, who on a day to day basis in establishing and running a plan are typically not litigators, need to remember that their communications can end up in a courtroom in later litigation that cannot even be foreseen at the time of the communications in question, and should be careful with regard to the accuracy, context, phrasings and tone of such communications as a result.
Liberty Mutual v. Donegan: The Second Circuit Reinforces the Broad Scope of ERISA Preemption
The Second Circuit has just released its opinion in Liberty Mutual v. Donegan, which concerns whether certain Vermont state reporting regulations are preempted as applied to an ERISA governed plan. The Court concluded that they were, but the more interesting part of the opinion is not its analysis of that particular issue, but rather its sweeping and accurate march through the history of Supreme Court ERISA preemption jurisprudence. It’s a welcome document, one that can be read both by any practitioner seeking a general understanding of the issue and, moreover, by any court or litigant seeking a starting point for an in-depth argument over the scope of preemption.
To me, one of the more significant aspects of the opinion is its focus on the fact that preemption is invoked by any state regulations that dictate plan terms, reporting or benefits in a manner that places the plan at risk of having to comply with multiple conflicting state requirements, as well as ERISA’s own requirements. This is a broad holding that reinforces this widely applied, but often contested, rule of ERISA preemption, and extends beyond the narrow, specific confines of the specific state reporting requirements at issue in Donegan. In this vein, it is interesting that the Court launched its analysis with this point:
ERISA broadly preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” Id. § 1144(a). With remarkable consistency, the legislative history reflects that this broad wording was purposeful: it was intended to eliminate the threat of a multiplicity of conflicting or inconsistent state laws . . . See 120 Cong. Rec. 29197 (1974) (Statement of Rep. Dent) (“I wish to make note of what is to many the crowning achievement of this legislation, the reservation to Federal authority the sole power to regulate the field of employee benefit plans. With the preemption of the field, we round out the protection afforded participants by eliminating the threat of conflicting and inconsistent State and local regulation.”); id. at 29933 (Statement of Sen. Williams) (discussing “inten[t] to preempt the field for Federal regulations, thus eliminating the threat of conflicting or inconsistent State and local regulation of employee benefit plans” and stating that “[t]his principle is intended to apply in its broadest sense to all actions of State or local governments, or any instrumentality thereof, which have the force or effect of law”).
In the end, although it is nice that the Court established whether or not Vermont’s reporting requirements were preempted, the more lasting and broader value is that a broadly respected bench has reemphasized the principle that plans cannot be subject to conflicting state regulation with regard to their primary operations. Application of this principle, on a practical level, is central to the efficient and effective operation of benefit plans, since so many operate across state lines, placing them at risk of conflicting legal duties and expensive compliance obligations if they must comply with each state’s unique approach to a particular issue regarding benefit plans.
Insurance Coverage for Disgorgement or other Equitable Remedies
You say disgorgement, I say damages. Sorry, I couldn’t, try as I might, make that fit into the old lyric “you say tomato, I say tomahto, lets call the whole thing off,” but the sentiment fits. In this recent Sixth Circuit decision, reported on here, the Court addressed the question of whether certain employment related damages could be considered disgorgement by the employer, which would not be covered under the employer’s insurance policy because it excluded disgorgement, or should instead be treated as traditional damages, which are covered. The Court concluded that the sums that were awarded could more fairly be described as damages owed to the claimants, and not as disgorgement of ill-gotten gains, and were therefore covered.
Its an interesting decision that raises two issues that companies that defend against employment related claims should always be aware of. First, that there is always room within their insurance policies to look for potential coverage, particularly given the growth of employment practices liability insurance over the past decade and more. Second, that the question of what constitutes disgorgement, or other equitable remedies which are also often not covered, can be a tricky question, and is not always obvious on first review. All sorts of policies limit coverage to awards that constitute damages as that term is understood in the law, often without defining the term, while excluding or otherwise precluding coverage for disgorgement or other types of losses that fall within the realm of equitable relief. It is important to make a thorough and accurate analysis of whether the sums at issue are properly construed as damages or instead as equitable relief in this realm, both for insurers deciding whether to provide coverage and for insureds electing whether to challenge a denial of coverage.
Mike Webster to Dwight Harrison: What they Tell Us About the NFL's Disability Benefits Plan
Wow – what more is there to say about this story by Michael Rosenberg of Sports Illustrated on the long and bitter fight by aging, 10 year NFL vet Dwight Harrison to obtain disability and pension benefits? The story itself is a beautiful piece of writing, humane and complex all at the same time.
There are a few particularly interesting aspects of the story that are worth commenting on. First, to those who wonder if the story is accurate and the picture painted believable, I can only say that none of us, without going back over the court record and filings, can really know. What I do know, however, is that the story reads like an exact replica of the Mike Webster story, which I wrote about here, which concerned that NFL star’s long battle to collect disability benefits from the NFL’s ERISA-governed disability plan, over a time period that matches up with the time period during with Harrison’s harrowing story unfolds. The similarities are eerie, and lend credence to Harrison and Rosenberg’s (no relation) version of events. One of the things that any good trial lawyer does in investigating and building a case is to look for similarities and contradictions among different parties’ versions of events, on the thesis that the consistencies are more likely true than not, given that more than one person reported them. The striking similarities between Webster’s story and Harrison’s story suggests that the story reported by Rosenberg is highly credible.
Second, and perhaps this also goes to the credibility question with regard to this story (since none of us are likely to ever go out and read the court record itself or to have access to all of the relevant medical records), everything that Rosenberg describes fits comfortably with the manner in which an ERISA disability and pension case would be litigated and processed. It rings, in essence, true to someone, like me, who has litigated those types of cases.
Third, and this harkens back to Webster’s case in which, after a long court battle, he eventually prevailed, overcoming many of the same obstacles faced by Harrison, is the interesting question of why Webster eventually did much better than Harrison has, so far, managed to do. The answer to that, quite simply, is lawyering. Webster, somehow, had access to excellent lawyering and was represented by what was clearly an outstanding lawyer. Harrison, it is clear from the article, for many years had no such access. The quality of legal representation, including the extent to which a plan participant’s lawyer has previous and substantial experience with litigating ERISA cases, makes a huge difference to the outcome of these types of cases: they simply cannot be properly litigated – particularly against a well-lawyered adversary like the NFL – by anyone who doesn’t have substantial experience and expertise in this area of the law.
Fourth, and this is particularly interesting to me, I have had the good fortune over the past few years to speak with more than one retired NFL player who had read my prior writings on the Webster case and wanted to speak with me about their own efforts to obtain long term disability benefits from the NFL. What is very interesting to me about the Rosenberg article is his description of the manner in which the NFL plan operated during the time period in question, including its tiers of benefits, all of which matches up with what I learned in discussions over the years with retired players. It is hard to make the complexities of disability plans and claim structures clear to anyone but experts, but Rosenberg does a good job here. If you want to understand the structure and operation of the NFL disability plan, his article is a good place to start.
Predicting the Future of Church Plan Litigation
Ahh, the wonders of church plan litigation. I had the distinct pleasure at an ERISA litigation conference recently of listening to a leading plaintiffs’ lawyer and a leading defense lawyer, who were both representing parties on opposite sides in class actions concerning whether benefit plans were actually church plans for purposes of ERISA, square off over the issue. What came through to me loud and clear were two distinct visions of the world, almost ideological in a way. The defense lawyer insisted that decisions to that date ran his way, and so there was little more to say on the subject, while the plaintiffs’ lawyer explained why close analysis of the facts and legal issues demonstrates that the plaintiffs’ bar is on target.
In their competing certainties over their positions, the debate reminded me of nothing so much as the early years of excessive fee litigation, when the plaintiffs’ bar was largely unsuccessful and the defense bar was more than happy to trumpet the underlying weakness on both a theoretical and practical level of that theory of liability. Of course, time would eventually turn the tables, to a large extent, on that discussion, triggered by an interesting phenomenon, one which was obvious in advance to some of us and became clear in hindsight to the rest of us: that over time, as more and more judges were asked to look at the excessive fee theory, the defense position would begin to show cracks and plaintiffs would eventually begin succeeding to one degree or another with such claims.
Even when I was listening to the two lawyers debate the viability of church plan litigation, it was clear to me we were only at the outset of the legal discussion on this issue, and that the defense bar’s assumption of an impregnable position was unfounded, as well as inconsistent with the history of what had occurred with the excessive fee cases. It was clear that what was more likely to happen was that, as the cases involving the more questionable assertions of church plan status came before courts, the plaintiffs’ bar would begin obtaining traction, and the clearly marked out defense position on these types of cases would weaken.
While I was on trial for most of this month, which I am still digging out from, Mike Reilly wrote a nice piece on something that I see as the first step in this phenomenon starting to come to pass, which was a federal judge denying a motion to dismiss last month that was grounded on the defendant’s status as a church plan. What is most interesting about that decision is that, plank by plank, the judge addressed and rejected the key elements of the defense bar’s standard position on church plan litigation, namely that the claims run contrary to existing judicial decisions and to IRS letter rulings. As the court’s decision itself reflects, the judge specifically engaged those arguments and rejected them.
What does this one decision mean? One can make the argument that it is an outlier, that standing by itself it means nothing in the long run, and has meaning only to the resolution of the specific lawsuit and plan at issue. Past experience with excessive fee litigation, however, suggests to me that the decision is more likely to be the beginning of the end of broadly claiming church plan status for broad, otherwise secular business activities – particularly in the medical area – that have some linkage to religious organizations. History – as well as logic – suggests to me that, bit by bit, we will see plaintiffs’ lawyers and court decisions chip away at the use of church plan status, leading to, eventually, a number of victories in this regard for the plaintiffs’ bar. This will not mean the end of the church plan, but will instead eventually lead to only those plans that most closely fit the purpose, intent and idea of the church plan exemption being able to claim it, with all other plans forced to abandon the claim (either voluntarily or after being sued).
Tick Tock, Tick Tock, Pay Attention to the Clock: The Importance of Procedural Timing Issues in ERISA Litigation
I have been tied up on trial out of state most of January, and am now starting to go back over the more interesting items that landed in my in-box during that time. One of my favorites is this Supreme Court decision in an ERISA case, which essentially holds that a party cannot wait for a district court’s resolution of a request for attorney’s fees before seeking to appeal any part of an earlier ruling on the substance of the ERISA claim. As Sarah Jenkins and Jon Laramore of Faegre Baker Daniels discussed in this piece – the first one I have seen discussing the substance of this opinion – the Court held in Ray Haluch Gravel Co. v. Central Pension Fund of the International Union of Operating Engineers that “an appeal was untimely because an unresolved issue of contractual attorneys' fees did not prevent judgment on the merits from being final for purposes of” the appellate clock.
While the details of the decision will be of immense interest – I am sure – to appellate mavens (oh where have you gone, Appellate Law & Practice blog?), the more interesting aspect to me is the decision’s unspoken and unacknowledged linkage to the Supreme Court’s very recent decision in Heimeshoff v. Hartford Life & Accident Insurance, which held that an ERISA claim could be barred by failing to comply with a contractual filing period established under a plan document. The combination of the two decisions drives home the highly technical nature of prosecuting ERISA claims, and the crucial importance of getting every step right so as to protect all rights of recovery available under the statute. As the two cases make clear, one can waive clear rights to recovery under ERISA by failing to prosecute them exactly as required and on the exact time schedule required by applicable plan terms and governing statutes. While some might view the particular timing requirements addressed in Ray Haluch Gravel and Heimeshoff as picayune, the Court’s strict enforcement of them make clear that parties seeking relief under ERISA had best not treat them that way.
Thoughts on Heimeshoff v. Hartford Life & Accident Insurance
The more I read yesterday's Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance, the more I return to the same position I expressed when the case was argued: that what the rule that is imposed by the Court turns out to be is much less important than that we actually have a clear rule. The Court established the rule here, and now all parties in the ERISA landscape can adjust to it and play by it. What it means is simply this: the minute a lawyer who represents participants has a new client walk in the door, that lawyer better scrutinize the plan documents and figure out when suit must be filed by. On a substantive, day in day out level, that is what the decision means.
Despite the fact that, on a day to day basis, the decision is not earthshaking in any manner, there are aspects of it that are of interest. You can start with the identity of the opinion’s author, which is Justice Thomas. The opinion falls in line, in the fundamental backbone of its reasoning, with prior opinions – concurring, dissenting or otherwise – by Justice Thomas on ERISA cases: that is to say that the logistical framework is the plan says X, the statute does not expressly require otherwise, and thus X applies. Sure, there is much more to the opinion, but all of the rest is, in many ways, just gloss added on top of that framework, in much the same way that ornaments are added to a Christmas tree, but it is still, underneath it all, a tree.
The other aspect that jumped out at me involves one piece of that gloss, which is the Justice’s suggestion that “[f]orty years of ERISA administration suggest” that claim administration is handled reasonably and generally promptly, and that under those circumstances, it should not be disruptive to enforce a reasonable contractual limitations period. While I can’t account for the whole forty years referenced by the Court, I can account for twenty or so of it in my own practice, and I would have to concur with Justice Thomas in this regard. Although there are certainly outliers that are to the contrary, my experience is that most claims are handled reasonably to very well by most plan sponsors and administrators, and that the exceptions to that rule are just that – exceptions. With that experience to draw on it, I doubt that reasonable contractual limitations periods will pose any type of a significant barrier to the efficient, effective and equitable resolution of claims.
Of course, whenever the Supreme Court weighs in on ERISA, it creates unforeseen ripples: one can think of a Supreme Court opinion on any issue under ERISA as the equivalent of throwing a pebble in a still pond, which creates waves in all directions. Going back at least as far as LaRue – which, by creation of the diamond hypothetical approach to loss, in turn gave rise to the no-diamond approach that some courts have used to find the absence of loss – Supreme Court decisions concerning ERISA have created a multitude of issues for lower courts to sort out and, more often than not, for plan lawyers to deal with in the day to day running and writing of plans. One would think that a simple ruling on a statute of limitations issue would not have that same effect, but I suspect one would be wrong, as the Workplace Prof notes in this excellent post on the decision, in which he comments on the potential future ramifications of the decision beyond simply its application to statutes of limitations.
Sprint(ing) Right to Federal Court to Protect Plans Against Preempted State Action
You know I think all things are about ERISA, and ERISA is about everything, don’t you? And of course, my view on this is even somewhat logical, and not just an outgrowth of my own personal interests. If you walk, talk, have health insurance, invest for retirement, have a pension or, even more so, work, you and your activities are governed, to a certain extent, day in and day out, by ERISA. That is, of course, an overstatement and oversimplification, but it drives home my point: ERISA regulated and governed activities that we interact with in day to day life are ubiquitous, even if most people are not aware of it.
I mention this because the Supreme Court issued a very interesting decision on Younger abstention Tuesday, in a case, Sprint Communications v. Jacobs, that concerned telecommunications and utility regulators, and had nothing to do with, and never mentioned, ERISA. And yet to me, if you think about it, the decision has a side to it that is very important to ERISA lawyers and particularly litigators, as well as to plan sponsors. In Sprint, the Court made clear that the reach of Younger abstention is very narrow, and it cannot be invoked to regularly deprive federal courts of their jurisdiction over issues governed by federal law, particularly where federal law preempts state action; further, the Court made clear that Younger abstention cannot prevent parties from seeking federal court protection of their federal rights in most cases involving civil remedies, and in particular in cases where state regulators take action that should be preempted by federal law.
I doubt that any statute has broader preemptive effects than ERISA, but at the same time, as noted above, ERISA touches a vast number of the day to day activities and financial interests of private citizens, even without many of them knowing it. This combination means that many state regulatory bodies can, accidentally or on purpose, act in ways that infringe on plan sponsors’ express rights under ERISA to be free of state regulation with regard to their employee benefit plans. Prior to the Supreme Court’s ruling two days ago in Sprint, there may have been some doubt, in at least some jurisdictions, over whether a federal court could act to protect that right while state regulators were proceeding with regard to an ERISA governed benefit plan. Sprint makes clear that the federal courts can intervene to protect the rights of plan sponsors to be free of state regulation, right from the get go, by enforcing ERISA preemption in the face of state regulatory action.
Public Pensions After Detroit and Stockton
Well, returning briefly to my series on municipal bankruptcies – you really can’t write regularly about pensions in this day and age without addressing, even if unwillingly, that topic – the NY Times has a very interesting article on Stockton, California’s effort to leave bankruptcy, by basically shorting bondholders while leaving the ever rising pension costs that was one of the key drivers of its insolvency untouched. You can hear in the article the skepticism as to whether, having not dealt with that problem, the city can remain solvent for any amount of time, rather than end up back in bankruptcy court again after failing to tame its pension exposures.
The impact of pension promises and debt on municipal finances cannot be understated, particularly after events in Detroit. At the same time, the problems they pose cannot be easily solved, either, because municipal leaders are faced with a highly unpalatable choice with regard to that issue: they can either raise taxes significantly (or substantially cut services, which in the long term is at least as politically dangerous to the political future of the elected officials involved, yet possibly even worse long term for the city than increased taxes) or they can, as one Stockton official put it, look people in the eyes and tell them they are having their benefits cut. Stockton appears to have avoided the latter, for the most part, by seeking a relatively minimal increase in the sales tax, but, as noted above, one wonders whether that will be enough.
At the end of the day, I hate to say it, but the only humane solution to the pension problems in places like Detroit and Stockton is likely to be some version of a bailout in the form of a derisking program, with the pensions turned into private annuities and cities taken out of the pension business once and for all. Its either that or a decision to cut benefits and leave retirees and current workers to bear that cost alone. None of the solutions are good, but the evidence says this is a long run problem that isn’t going away.