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

Posted By Stephen D. Rosenberg In 401(k) Plans , Benefit Litigation , ERISA Statutory Provisions , Fiduciaries
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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

Posted By Stephen D. Rosenberg In 401(k) Plans , Employee Benefit Plans , Fiduciaries
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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

Posted By Stephen D. Rosenberg In Copyright Infringement , Design and Architecture: Protection of Rights , ERISA Statutory Provisions , Employee Benefit Plans , Equitable Relief , Intellectual Property Litigation , Patent Infringement , Pensions , Retirement Benefits
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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

Posted By Stephen D. Rosenberg In Employee Benefit Plans , Health Insurance , Third Party Administrators
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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

Posted By Stephen D. Rosenberg In 401(k) Plans , Class Actions , Fiduciaries
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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.

The Centre Barely Holds: ERISA Preemption After Gobeille v. Liberty Mutual Insurance Company

Posted By Stephen D. Rosenberg In Preemption
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When I was a very young lawyer practicing policyholder-side insurance coverage law, prominent coverage lawyer Jerry Oshinsky, still relatively fresh off inventing the triple-trigger, described to me the concept of “partial equitable subrogation” in the context of insurance law as “black magic,” in that it was basically a standard-less concept that courts applied as they saw fit. He was overstating the case, of course, for comedic (by lawyer standards anyway) effect.

I bring this up today, some quarter century plus later, because I have often thought of that exchange when I am asked to discuss preemption under ERISA. I have always thought that ERISA preemption and the standards that govern it can be so amorphous and malleable that the question of whether a particular state statute or regulation is preempted is often in the eye of the beholder. This notion seemed particularly apt to me when I read the Supreme Court’s recent ERISA preemption decision in Gobeille v. Liberty Mutual, in which the majority opinion and the dissent applied the exact same standards to the same set of facts and came up with exactly opposite conclusions.

My thoughts on that led to an article, titled “The Centre Barely Holds: ERISA Preemption After Gobeille v. Liberty Mutual Insurance Company,” that will be published by Bloomberg BNA. I am discussing a draft version of the paper at a meeting of the Bloomberg BNA Compensation Planning Tax Advisory Board next Thursday, May 19, 2016, which will be followed by a reception. If you would like to attend the event, feel free to email me and I will forward you an invitation. If you want to read the paper but don’t want to attend, circle back to me after its published and I will get you a copy then.


Halo v. Yale, the Second Circuit, Hamilton and Sideways Challenges to the Scope of Discretionary Review

Posted By Stephen D. Rosenberg In Benefit Litigation , ERISA Statutory Provisions , Employee Benefit Plans , Long Term Disability Benefits , Standard of Review
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In the musical Hamilton, everyone from Aaron Burr to Hamilton’s wife, Eliza, asks why Hamilton always “writes like he’s running out of time,” and the lyrics assign various pop psychology rationales to his urgency. This morning, though, after listening to the soundtrack again, I realized the real reason – he’s a lawyer! He’s always on deadline and running out of time!

Me too, which is why I haven’t had time to post regularly lately, but, between all the briefing and court hearings, I have been reading everything that has crossed my desk, making note of a number of recent decisions that I wanted to comment on. Interestingly though, the luxury of waiting to write on them – not of my choosing, but nonetheless – has allowed time for a theme to emerge, and it is this: we are seeing a series of cases coming out of major courts that are aggressively pushing back against the unbridled assertion of broad discretion by plan administrators operating under a grant of discretion. For years, commentators have argued that the breadth of discretionary review was excessive, and even many judges, while broadly applying that scope of review, have commented in dicta that the extent of that scope should be revisited by higher tribunals or Congress. I myself have, time and again, while winning cases on behalf of administrators, fiduciaries and sponsors, had the experience of judges ruling in favor of my clients noting at the same time that their figurative hands were figuratively tied by circuit and Supreme Court jurisprudence, and on occasion commenting that the claimant’s complaints in that regard were more properly addressed to Congress than to a district court judge.

But, to continue the Hamilton references, for every action there is an equal and opposite reaction. In Hamilton, Thomas Jefferson uses this law of physics to explain the breaking up into factions of George Washington’s cabinet. Here, though, I think it holds true as well as an explanation for a series of recent decisions that have placed some checks on the freedom of action of plan administrators operating under grants of discretion. Over time, in reaction to the evidentiary and substantive benefits granted to plans and their administrators by discretionary review, and in response to clever arguments made over the course of years by lawyers for participants seeking to undermine discretionary review, courts have begun developing doctrines that reign in, to a certain degree, the advantages granted to administrators by a discretionary grant. For the most part, these are not direct restrictions on the exercise of discretion itself, but instead consist of challenges to the applicability at all of discretion, such as in the form of decisions holding plan administrators to strict compliance with technical requirements of claims handling upon pain of losing the benefits granted them by discretionary review.

An excellent example of this phenomenon is the Second Circuit’s recent decision in Halo v. Yale Health Plan, Dir. of Benefits & Records Yale University, which addressed the impact on discretionary review of an administrator’s failure to strictly comply with the claims handling regulations of the Department of Labor, and which held that non-compliance could forfeit a grant of discretion. The Court held that “when denying a claim for benefits, a plan's failure to comply with the Department of Labor's claims-procedure regulation, 29 C.F.R. § 2560.503–1, will result in that claim being reviewed de novo in federal court, unless the plan has otherwise established procedures in full conformity with the regulation and can show that its failure to comply with the claims-procedure regulation in the processing of a particular claim was inadvertent and harmless. Moreover, the plan ‘bears the burden of proof on this issue since the party claiming deferential review should prove the predicate that justifies it.’”

This theme – of sideways, rather than frontal, attacks on the application of discretionary review – has cropped up in a number of recent decisions. With any luck, if I don’t run out of time, I will comment on those decisions and how they fit in this theme in upcoming posts.

A Brief but Reasonably Thorough Intro to the New Fiduciary Standard Being Issued Today

Posted By Stephen D. Rosenberg In Conflicts of Interest , Fiduciaries
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Crazy busy today, but – like someone on the highway slowing down to look at a wreck in the opposite lane even though it is an unnecessary distraction – I of course can’t help but read all the commentary on the new fiduciary rule due out of the DOL today. So for fun – and to distract me from the work I should be doing – I have compiled my favorite stories on it, along with a brief comment or two on each one, below:

• I was basically clickbaited by the headline of this article in the Washington Post into burning one of my free articles for the month to read it, only to basically be told that the rule means that “brokers selling investments to retirement savers would be required to put the client’s interest ahead of their own.” Ehh – if you read this blog, you probably already knew that. Still, it’s a good and readable thirty thousand foot view of the forest, without much specificity.

• If you want to see more of the trees – to continue my forest analogy – I really liked this story in planadvisor, which details the DOL’s explanation for how the rule has been changed to account for industry concerns.

• If you really want to delve down into the trees, here’s the DOL’s fact sheet explaining how it changed the rule to accommodate concerns raised by the industry. I have two thoughts on this fact sheet. First, my internal (and always close to the surface) cynic immediately thought “me thinks you protest too much,” making this big an argument demonstrating how you met your opponents’ concerns. Second, the good governance doobie in me, who resides only slightly below my internal cynic, thought this is exactly what a government agency and regulator should do: listen to affected parties, account for their concerns, address the problems, and explain what was done in response.

• That said, the DOL’s fact sheet on the new rule itself is excellent, and provides real detail on key issues such as the impact of providing financial information to consumers and the best interest exemption.

• And finally for now, I really like Pensions & Investments’ article on it this morning, “Final fiduciary rule exempts plan sponsor education.” Although the title would lead you to believe it is only about the education part of the rule, and the fact that – happily – it will not trigger fiduciary status under the new rule, its actually a very good overview of the key issues in play with the issuance of the new rule today.

The rule comes out later today, but the stories and fact sheets above should give you a thorough preview.

12th National Forum on ERISA Litigation - View From the Bench

Posted By Stephen D. Rosenberg In ERISA Seminars and other Resources
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As many of you know, I have spoken at ACI’s ERISA Litigation Conferences over the years on topics as diverse as legal ethics in the context of ERISA litigation, ERISA remedies, discovery issues and fiduciary governance, among other topics. I have always been a fan, though, of the judicial panels at the conferences, where – much as the name suggests – panels of federal judges discuss topics of importance to ERISA litigators. I have never left one of those panels without useful information that I have promptly put to work. I will give you one example. Over the past few years, I have been litigating a case with significant issues concerning spoliation of electronically stored information, a topic which has been discussed extensively at the panels. One question I asked from the audience a couple of years ago on the topic led to further discussions after the panel, in the lobby of the hotel where the conference was staged, with a federal magistrate judge on the topic. All of that insight animated my strategy with regard to my spoliation case over the years.

Because I like those panels so much, I have been agitating with the conference organizers for years to give me the keys to one of the judicial panels, in the guise of being offered the opportunity to moderate the panel at an upcoming conference. My entreaties were finally heard, and I will be moderating the presentation by the judicial panel at ACI’s West Coast installment of its ERISA litigation conference in June.

You can find information on the conference here, but of perhaps even more value in the short run, you can also get a reduced rate for the conference, by calling ACI at 212-352-3220 ex. 5511 or emailing Joe Gallagher at ACI before the close of business on Tuesday March 29th and mentioning my name. Hope to see you there and, by all means, if you are a reader, be sure to say hello and introduce yourself.


Gobeille v. Liberty Mutual Insurance Company: The Interesting Things Are in the Concurrences and the Dissent

Posted By Stephen D. Rosenberg In Preemption
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So, anyone besides me remember that great scene in 48 Hours where Luther goes to pick up a car at a parking garage where it was left years before, and responds to the cashier’s comment about how long its been by shouting “I’ve been busy!”? I always think of that when I get so busy that my blogging falls behind. You know that Supreme Court decision on preemption, Gobeille v. Liberty Mutual Insurance Company, that has been out for a few weeks but I haven’t written on yet? Well, I’ve been busy!

That said, though, one of the beneficial side effects has been that I have been mulling over the opinion for a couple of weeks now without putting finger to keyboard to discuss it, and I have found that my thoughts about it have become more nuanced than they would have been if I had been able to write about it after first reading it. At that point, my thoughts would have probably run along the lines of everything else that has been written about it, which have tended to be that here’s a case that reaffirms the strength of preemption, which is pretty much what everyone else has said about it (although Professor Secunda, the former workplace prof, did tweet a different response to the opinion, to the effect that the justices are just plain wrong about the scope of preemption).

To a certain extent, that original consensus about the opinion (that it reaffirms and demonstrates the strength of ERISA preemption) is, in fact, correct, but it also created a sort of bored response to the opinion, something perfectly captured by this prominent blogger’s post on the decision, with its “I am so bored, how many times have I seen this before” tone. And the ennui in response to the opinion is not surprising – I think almost everyone believed that ERISA preemption applied here and that the Supreme Court would reach that conclusion, as it did.

But to me there is something more interesting buried in the backdrop and in the cluttered collection of opinions that make up the decision. First off, there is no question that, for present purposes, the decision drives home the power of ERISA preemption and, in fact, reinvigorates it. The majority opinion provides what might best be described as a taxonomy of ERISA preemption doctrines, and every good defense lawyer should be able to find a foundation for a claim of ERISA preemption in that taxonomy for almost any state law claim made against a plan.

But what’s interesting to me is that three justices – Thomas, Ginsburg and Sotomayor – in two different opinions (one concurring and one dissenting) wrote independently to suggest that ERISA preemption has gone off the rails and either may not be (in Thomas’ view) or is not (in the view of the other two justices) as broad as the majority opinion insists, or as broad and sweeping as most ERISA litigators argue. Both opinions, in fact, give guideposts to litigators for arguing in the future against preemption, with Thomas, in fact, seemingly inviting someone, somewhere to attack the very constitutional foundation of applying ERISA preemption to the extent that it has been traditionally applied.

I will be curious to see whether, five years or so down the road, we look back and view Gobeille as some sort of high water mark with regard to the strength and power of claims of ERISA preemption, and come – with the benefit of hindsight – to see the differing but sustained attack by Thomas, Ginsburg and Sotomayor in Gobeille on the scope of ERISA preemption as the beginning salvo in a gradual scaling back of the scope of ERISA preemption.